Spain’s economy heads toward financial crisis, external help

MADRID - Agence France-Presse

A shovel and a jackhammer stand in front of the euro sculpture near the European Central Bank in Frankfurt. The bank may need to do more for Spain, an economist says. AP photo

Spain, sucked back into the center of the eurozone debt crisis, is headed toward a financial crunch in 2013 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,” said IHS Global Insight economist Raj Badiani.

Massive lending by the European Central Bank 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.
But 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.

Banking woes
“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 Prime Minister Mariano Rajoy’s conservative government are daunting.
It approved a 2012 budget on April 30 that includes 27 billion euros 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 3.0 percent in 2013.

But 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 2011.

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 in 2011.

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

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”.

Edward Hugh, independent economist based in Barcelona, said international investors were convinced that Spain would need to restructure its debt at some point in the next 10 years. But the crisis could come sooner, he said, casting serious doubt on Madrid’s ability to meet its deficit-cutting target for 2013.

“This could all come unstuck next year,” Hugh said.

“I don’t think there is any real possibility they can get to three percent next year,” he added.

“Secondly, the economy is going to be contracting next year. They are not going to be able to get unemployment down.”

Hugh warned a crunch could even come this year as bond yields rise, saying it was still unclear how the government could finance its plans to recapitalise Spain’s banks.

“I don’t see anything on the table that is going to turn this around,” Hugh said.

“I don’t think we will see much in the way of growth in Spain in the next five years. We are going to have two years of recession right now, then at the best we can see two of years of timid growth and then we could have another recession,” he warned.

Spain did not face an immediate collapse because the ECB would step in, Hugh added.

“But this is not a situation with a way out. They have just let it all get too much and now it is in danger of getting out of hand.”