CATALONIA -- The Dismal Scientist

The Dismal Scientist

If Spain's recovery is too weak to prevent a period of severe deflation, the country could see a vicious spiral where falling prices cause firms to cut production, putting downward pressure on wages and demand, resulting in further price declines. There is also a chance that some Spanish banks could need additional capital even though the bailout has ended. The ECB’s comprehensive asset quality review and stress tests later this year could identify new weaknesses in the balance sheets of Spanish banks. A major outstanding question about the tests concerns the source of public funds for banks that can’t raise needed capital in the private market. If officials cannot work this out before the test results are released, Spanish banks that need additional capital may not get it.