Mon, Jul 23, 2012 - Page 15 News List

Markets defy Spain’s cuts, pushing it into ‘death spiral’


A man holds up cut-outs depicting Spanish Prime Minister Mariano Rajoy, left, Santander bank chairman Emilio Botin and Socialist Workers’ Party leader Alfredo Perez Rubalcaba on Saturday in front of Madrid’s City Hall at an unemployment protest.

Photo: Reuters

A eurozone bailout for Spain’s banks and a tough batch of pay cuts and tax hikes have not been enough to save the country from the risk of a full-blown bailout, analysts warn.

Squeezed between public outrage at its austere economic reforms and pressure from European authorities to strengthen its public finances, the Spanish government has run out of ammunition.

Hundreds of thousands of Spaniards took to the streets on Thursday in the biggest of a string of angry anti-austerity protests.

On Friday, the stock market fell 5.8 percent and sovereign interest rates rose to dangerous levels, despite the eurozone’s approval for a credit line of up to 100 billion euros (US$122 billion) for the banks.

Spain has entered a “death spiral” with its rising financing costs complicating its efforts to pay off its debts, Rabobank analyst Richard McGuire said.

Capital Economics analysts said: “With the outlook for Spain’s public finances still closely tied to that for its banking sector, there remains a strong risk that the Spanish government will need its own bailout.”

This month, Spain is due to become the fourth eurozone country, after Greece, Ireland and Portugal, to get bailout funds in the crisis.

Despite this, the return on Spanish 10-year bonds jumped above the 7 percent danger level and another key measure, the difference between the yields on Spanish and safe haven German bonds, topped 600 points.

“This is surprising, especially considering the recent package of savings measures ... and the definitive validation of the bank bailout,” said Daniel Pingarron, a strategist at IG Markets trading group.

“A large number of investors think that the possibility of a break-up of the euro is rising,” he added.

The Madrid stock exchange plunged by 5.8 percent on Friday, after one of Spain’s indebted regional authorities, Valencia, reached out for aid from a 18 billion euro central government fund.

The markets have defied Spain’s latest deficit-cutting measures, passed by the Spanish parliament on Thursday: 65 billion euros in fresh austerity measures including cuts to pay and unemployment benefits.

“Front-loaded austerity is likely to deepen and prolong the recession,” Christian Schulz, an analyst at German bank Berenberg, wrote in a report.

“Unemployment may rise further in the short-term, increasing the risk of a political backlash,” Schulz added.

Without better economic news, “Spain may risk losing market access” for borrowing to finance its day-to-day operations, he said.

On Friday, the Spanish government cut its economic growth forecast for next year from 0.2 percent growth to a contraction of 0.5 percent. Unemployment is at more than 24 percent.

Analysts at financial group Citi forecast a much harsher contraction of 2.1 percent for this year and 3.1 percent in the next.

However, Pingarron saw the risk of a full bailout for Spain as still relatively remote due to its formidable cost, estimated at about half a trillion euros overall.

Compared to Spain, which accounts for 12 percent of the eurozone’s GDP, the three countries already bailed out are small, making up 6 percent of eurozone GDP between them.

“A full bailout for Spain and its contagion to Italy would be unfeasible for the eurozone and everyone knows it,” Pingarron wrote in a note. “So although its seems an obvious solution, it doesn’t seem close to happening.”

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