Wednesday, April 11, 2012

Spain, the next pain?

One more euro zone country makes headline.  Spanish bond yields surged (close to 6%) to a level which triggered some of the other European countries to seek bailout measures.  This is despite the austerity measure that the Spanish government announced recently.  Italian bonds also surged fueling concerns that euro zone's debt crisis is worsening. ECB recently had two tranches of liquidity infusion to ease tension.

Fourth largest economy of  euro zone Spain, is a part of PIIGS (Portugal, Italy, Ireland, Greece and Spain), countries worst affected by European debt crisis . As recently as January this year, S & P downgraded Spain's credit rating by two notches and set its outlook to "negative".  

Spain's public debt (as a % of GDP)  at 68.5% (2011) is lower than euro zone average of 90% and much lower than the other larger economies in the zone. Germany and France are above 80% and Greece close to 140%

GDP grew albeit at a slow rate of 0.7% last year as against Greece and Portugal's economies which registered -6.9% and -1.6%. However Spain's economy is expected to contract this year and continue to deteriorate as there are  deep spending cuts in its recent austere budget 

Deficit (as a % of GDP) is at a level comparable to Greece, Portugal and Ireland whereas unemployment at a whopping 23.6% looks worse than most of the other countries.  Spain is likely to miss its 2012 budget deficit goal approved by the EU. 

So, will Spain seek bailout?  A lot depends on its fiscal discipline.  Also tighter budgets (read reduced public spending) and high unemployment rate is not an exciting combination.  Significant part of bank loan has been extended to construction and real estate sectors which continues to be at a serious risk of default. This is only pushing up credit risk and borrowing costs further. While Spanish government is doing it's homework to put its house in order, Spain is likely to be dull and prolonged pain. 

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