Spain announced today they will contribute €3.9bn towards the Greek bailout. Of course they don’t have that sort of money without creating more debt. The markets reacted by increasing Spanish Bond yields. If that trend continues Spain will soon be asking for a bailout of their own.
I believe the true state of Spain’s economic woes have not yet been revealed. It’s not an open economy. The austerity measures they are announcing are no way near enough.
Investors are becoming very nervous about the Eurozone and consequently the value of the Euro on world markets is dropping.
“We now project that real GDP growth will average 0.7% annually in 2010-2016, versus our previous expectations of above 1% annually over this period.”
We have also revised our views on the GDP deflator, so that we now expect nominal GDP to regain the 2008 level by 2015; previously, we had assumed that nominal GDP would exceed the 2008 level in 2013. In addition, and while not factored into our base case, we have taken into account the possibility that Spanish public and private sector borrowing costs could remain elevated in 2010-2011 and further slow Spain’s recovery from the current recession. Our conclusion is that challenging medium-term economic conditions will further pressure Spain’s public finances, and additional measures are likely to be needed to underpin the government’s fiscal consolidation strategy and planned program of structural reforms.
Spain will now be paying more to service it’s deficit. With a negative outlook that cost can only increase unless the Spanish government quickly implements austerity measures. ie: pensions, public sector wages and benefits, new infrastructure projects, healthcare. The list is long.
If the markets do not see some willingness that Spain has serious intent to live within it’s means then another Greek style disaster will happen in a short time. It’s as certain as death and taxes.
This time other EU states will not be able to bail out Spain. Greece and Portugal perhaps but Spain is a country too far. Default would be the only result.
Maybe the IMF could help a little but the sheer scale of the problem is daunting. Spain has a larger economy so the scale of the debt is proportionate.
Economic recovery is the only real effective route. That means for Spain a major turnaround in the construction industry on which it is so dependent. What are the chances of that happening in time?
Britain and Germany would have to enjoy annual growth of 3-4% before their nationals start buying property again in meaningful numbers. Banks and the money markets will need to free up capital for lending back to levels seen in 2006/7. In other words a resumption of a property bubble fuelled by inflationary pressure.
I don’t think that is likely to happen. Regulatory measures taken by all government, including the US, post recession and a weakened financial system will prevent it for years to come.
I just cannot see Spain coming out of this problematic state for years. It seems that growth is the solution, and I see no sign of this in the foreseeable future. As for the construction industry, surely this will never “come back”, as without the bubble it wouldn’t have happened in the first place.
Time for Spain to build you revenue streams, but that will take a lot of time, and in any case I see no sign of anyone trying this.
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