Spain's troubles worsen, sparking new phase for euro crisis
Spanish share prices plunged by more than three percent on Wednesday, as investors worried whether the European Central Bank and its partners have听to rescue the ailing Spanish economy.
The nation鈥檚 bond yields rose sharply on Wednesday while equity markets across Asia and Europe also suffered selling as investors faced reality: Spain鈥檚 2013 budget, to be unveiled on Thursday, won鈥檛 cut nearly enough spending to reach the 2012 deficit target of 6.3 percent of gross domestic product.听
听鈥淭here鈥檚 a good chance that whatever is announced tomorrow won鈥檛 be nearly enough,鈥� said Ben May, an economist at Capital Economics.
Protestors took to the streets of Madrid on Tuesday night and looked set to stage new protests on Wednesday, underlining the public鈥檚 lack of appetite for further budget cuts.听 That anger has spilled over to Spanish politics.听 Catalan President Artur Mas on Tuesday called a snap election, asking voters to view the poll as a declaration of independence from Madrid, raising the real possibility of a full-blown Spanish constitutional crisis. Catalonia, in the north of Spain, and home to Barcelona, is the country's wealthiest region.
Spain is likely to request assistance from international creditors well before Catalonian voters go to the polls.听 Analysts believe Madrid will accept defeat when 10-year bond yields top seven percent.听 With 10-year yields creeping above six percent on Wednesday, a phone call to the ECB could be just weeks away.
But a Spanish rescue package won鈥檛 draw the euro crisis to a close.听 Far from it, say analysts. Rather, a request for help from one of the euro zone鈥檚 larger countries would mark the beginning of a new phase in the region's debt woes.听 For one thing, external assistance may be slow to reach the markets, as Spain is sure to resist some of the听听designed to support the smaller euro zone countries.听
鈥淪pain is unlikely to comply鈥� with the conditionality demanded by lenders, said Nicholas Spiro of Spiro Sovereign Strategy. 鈥淚t doesn鈥檛 see itself as a ward of the euro state.鈥�
More importantly, those austerity conditions demanded by the troika of lenders 鈥� which groups the European Central Bank, the European Union and the International Monetary Fund 鈥� are exactly what is worsening recessions in a number of countries.听听 鈥淕iven the dire state of its economy, Spain needs further austerity like it needs a hole in the head,鈥� said Spiros.听
Earlier on Wednesday, the Bank of Spain warned that the economy continued to contract 鈥渁t a significant rate鈥� in the third quarter.听 The current recession 鈥� Spain鈥檚 second in three years 鈥� has left one quarter of the work force jobless.
鈥淪pain is at a critical juncture,鈥� said Spiro, as austerity has become 鈥渟elf-defeating.鈥澨� Further austerity only 鈥渄epresses growth and eats into the tax base.鈥澨� That leads to sustained, or even increasing joblessness and a higher welfare bill.
The same could be said for other countries on the euro zone periphery 鈥撎�, Portugal, and even Italy.听 All face a raft of economic problems, namely a lack of competitiveness and a narrow tax base.听 Exorbitant borrowing costs 鈥� the target of the Troika鈥檚 rescue mission 鈥� are simply 鈥渁 symptom of deeper problems,鈥� said May.
That鈥檚 why a Spanish bailout, whenever it comes, will buy some time for struggling euro zone nations, but will fail to address the region鈥檚 longer-term competitiveness problems.听 鈥淲e know the record of time-buying strategies. They fail,鈥� said Spiro. 鈥�Mr Draghi [ECB President Mario Draghi] is fully aware this is a short-term palliative at best.鈥�
Only a full-scale banking and fiscal union, one that allows the mutualization of debts across the euro zone, will insulate soverign euro countries from sporadic attacks on fixed income markets.听 鈥淭hat may not come for years 鈥� or decades,鈥� said Spiro.
