Analysis

The strain on Spain: are we heading for a Spanish bailout ?

25 Jul 2012
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Region: 
EU/Eurozone

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  • This week Spanish borrowing costs have reached new euro-era highs of over 7.5%. These costs are starting to look ruinous for an economy already struggling to emerge from a steep public deficit and sharp  economic  contraction. Madrid is painfully close to  being priced out of debt markets altogether. Although it can bear  this expense for a while,  it could quickly become self-defeating.
  • Mariano Rajoy’s  Partido Popular government has  played a  comparatively strong hand with a surprising lack of confidence,  but  it has also been hobbled by a massive  banking crisis and collapsing growth.
  • The stark reality is that the only answer for Madrid is for yields to  fall back  relatively quickly  to sustainable levels more like the 5%  of early 2012 and to stay there. If this sounds unlikely, then the  only conclus ion can be that a Spanish bailout is probably just a question of time.
  • If the contagion effect from a Spanish bailout was to force the same course on Italy, which  is probable , then the resources of  the current  Eurozone  bailout funds would be  insufficient. A Spanish bailout, even if it did not trigger a crisis in Italian sovereign debtmarkets,would push the Eurozone into a new and critical phase.

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