Mon, Apr 09, 2012 - Page 10 News List

Spain heads to financial crisis, possible rescue

TROUBLE BREWING:Spain has announced an austerity budget, but a worsening recession means Rajoy’s government will find it hard to reach fiscal targets

AFP, MADRID

Spain, sucked back into the center of the eurozone debt crisis, is headed toward a financial crunch next year that may force it to seek international help, analysts warn.

Alarm has spread on the financial markets over Spain’s rising public debt, bulging deficit, fragile banks and a slide into recession at a time of soaring unemployment.

Investors pounced in the past week, forcing the government to pay higher borrowing costs at a bond auction and snapping up securities that pay out in the case of a default on sovereign debt.

“Despite rising Spanish bond yields and bond market jitters in recent weeks, Spain is not in any immediate danger,” IHS Global Insight economist Raj Badiani said.

Massive lending by the European Central Bank (ECB) at rock bottom rates to banks in the eurozone had secured Spain’s liquidity and mitigated the impact of Spain’s economic and fiscal woes, he said.

However, greater danger lay ahead.

“The risks are expected to intensify in 2013 with Spain battered by a crippling combination of a lingering economic downturn, challenging financing requirements, a labor market close to meltdown and a banking sector struggling to contain ever-increasing troubled real-estate assets,” he warned. “Indeed, the continued tensions in the banking sector, resulting from the deteriorating quality of its real-estate assets and domestic government debt holdings, could prompt the need for additional capital injections from the state or external interventions.”

Ultimately, the ECB could be forced to provide Spain with more protection than its current policy of buying government bonds on the market and offering cheap three-year loans to eurozone banks, Badiani said.

The challenges facing Spanish Prime Minister Mariano Rajoy’s conservative government are daunting.

It approved this year’s budget on April 30 that includes 27 billion euros (US$35.4 billion) in spending cuts and tax increases, determined to meet its targets to slash the public deficit from a runaway 8.5 percent of annual economic output last year to 5.3 percent this year and just 3 percent next year.

However, analysts say the task of meeting those targets will just get harder as Spain enters recession and with official forecasts that the jobless rate will rise to 24.3 percent this year from 22.85 percent at the end of last year.

Large annual public deficits have rapidly pushed up the accumulated public debt, expected to rise to 79.8 percent of economic output this year from 68.5 percent last year.

“Spain’s borrowing costs are up due to fears that recession will hinder deficit reduction,” Standard Chartered Global Research analysts Sarah Hewin and Thomas Costerg said in a report.

The banking sector was vulnerable to losses on stricken real estate assets accumulated before the 2008 property bubble collapse, they warned, and it “may need a bailout to assist restructuring.”

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