Spain the next pain?

Kamala Aithal

One Eurozone country that is making the headline for wrong reasons is Spain. 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 Eurozone's debt crisis is worsening. ECB recently had two tranches of liquidity infusion to ease tension.

Fourth largest economy of the Eurozone, Spain is a part of PIIGS (Portugal, Italy, Ireland, Greece and Spain) – the countries worst affected by European debt crisis. As recently as January this year, Standard & Poor 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% (in 2011) is lower than Eurozone average of 90% and much lower than the other larger economies in the zone. Germany’s and France’s are above 80% and Greece’s is close to 140%

Its 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 because there are deep spending cuts in its recent austerity 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. A significant part of bank loans has been extended to construction and real estate sectors which continue to be at a serious risk of default. This is only pushing up credit risk and borrowing costs further.

While the Spanish government is doing its homework to put its house in order, Spain is likely to be dull and prolonged pain. 

Kamala Aithal is the founder of a consulting firm that assists corporates develop Risk Management Framework and a regular contributor to Wisonomics column. The views and opinions expressed in this article are those of the author and does not reflect the views or position of

Comments powered by Disqus