When word of another impending bailout rocked headlines a couple of weeks ago, market junkies worried that it would only be a matter of time until the debt contagion would spread to Spain. So now that the Portuguese have actually screamed “Mommy!” to the EU and IMF, how is Spain doing?
It might surprise you to know that Spain is holding up well compared to when Greece and Ireland sought for financial backup. I know that might sound as absurd as the Jersey Shore cast getting a hefty raise for the upcoming season, but it’s true.
Back when Ireland announced its request for a bailout, the spread between Spanish bonds and German bonds (considered to be the safest among the EZ nations) almost widened to 300 basis points, which was the highest we’ve seen since the euro was created. Following Portugal’s announcement, however, the spread narrowed to around 175 basis points, indicating that investors are buying up Spanish debt.
Some say that perhaps Spain has somehow wooed the markets. After all, the government’s austerity measures have produced commendable results. Its budget deficit has fallen from 11.1% of GDP in 2009 to 9.2% in 2010. Heck! It may even fall to just 6% of GDP this year!
Another reason why investors seem to be playing favorites with Spain is that recapitalizing the Spanish banking system won’t be as big a headache as other bailouts.
Take Ireland, whose bank bailout tipped the scales at 45% of its GDP, for comparison. Estimates say that AT WORST, Spain’s banking capital needs may only be about a fourth of what Ireland needed as a percentage of its GDP.
I’d like to stress that these estimates are worst-case scenario forecasts, and that the overall cost of recapitalizing will likely be much lower. In any case, from this angle, I think it’s pretty easy to see that Spain’s banking problems aren’t in the same league as Ireland’s.
So if Spain is neither Portugal nor Ireland, then it must be in the clear, right?
Sorry mi amigo, but the world isn’t that black and white. Just because Spain isn’t as troubled as Portugal and Ireland doesn’t mean it’s safe from contagion. It clearly still has some economic issues to resolve.
First and foremost, its unemployment rate stupefies me with how it has managed to stay so high at 20%. One out of every five able bodied worker is jobless?? That’s insane!
Second, it still has pretty big financial roadblocks standing in its path to recovery. Unlike the central government, many of Spain’s autonomous regions have been spending dough like it was going out of style. It’ll have a hard time reining in its growing debt if these regions keep going above their budgets.
Then there’s the issue of the ECB’s recent rate hike. If Spain had a hard time paying off its debt before, how is it gonna fare with higher borrowing costs now?! Uh huh, probably not very well! And who knows how much worse things will get if the ECB raises rates by another 0.75%, as most are expecting, by the end of the year!
As much as I’d like to say Spain is out of the woods, I would clearly be lying if I said so. But saying that it’s in as deep doo doo as some of the other PIGS would be an injustice to Spain’s austerity measures. So if it’s neither black nor white… Then what is it?