Spain’s contagious collapse

The EU faces its biggest challenge to date: Containing Spain's economic woes

Topics: GlobalPost, European Financial Crisis, European Union,

BRUSSELS, Belgium — The words “Spain” and “contagion” have already made history together.

Global Post

Spanish flu spread around the world in the early 1900s. The pandemic didn’t begin in Spain, but it was there that the world realized how serious — and unstoppable — the outbreak had become.

Now, as Spain takes up a central position in Europe’s economic crisis, the analogy is clear.

Sickly economies in Greece, Portugal and Ireland may yet respond to the European Union’s limited array of economic remedies.

But if Spain’s attempt to heal itself with a shock-treatment of austerity fails, the EU may not be strong enough to prevent the infection from spreading to Italy, France and beyond.

“The big question is, can Europe ring-fence Spain, can they draw a line to stop this contagion happening? This is their biggest challenge,” says Carsten Brzeski, senior Brussels economist at the Dutch bank ING.

In the eye of the euro-debt storm late last year, Spain enjoyed a reprieve from the markets after Conservative Prime Minister Mariano Rajoy took office in December with a promise to knock the economy into shape and, more important, the European Central Bank’s (ECB) decision to give banks and governments a lifeline by pumping 1 trillion euros of cheap loans into the eurozone economy.

Things started to go sour in March when the effect of the ECB’s liquidity injection began to fade and Rajoy announced he wouldn’t be able meet an EU-agreed budget deficit target of 4.4 percent this year, despite 27 billion euros ($35.5 billion) worth of budget cuts and tax hikes.

“Spain is suffering from a serious loss of confidence again,” blogged economist Luis Garicano. “The perspective of a new reformist government had made our creditors think Spain was on the way up, now after the budget and some strange events, confidence has gone again.”

The rates Spain has to pay on borrowed money have been creeping up steadily.

On Tuesday, there was some relief as the country managed to raise 3.2 billion euros ($4.2 billion) in short-term loans, but at much higher rates. A bigger test will come on Thursday when the Madrid government tries to sell longer-term securities.

The yield on its benchmark 10-year bond has been edging over 6 percent — which is considered unsustainable for more than a short period. That is prompting concern Spain could be forced to seek a bailout from the EU and International Monetary Fund or worse: the risk of a Spanish default has risen to 37 percent, according to the consultancy CMA.

A bad bond auction on Thursday could cap a tough week for Rajoy, who has already seen Argentina’s President Cristana Fernandez feel confident enough of Spain’s weakness to announce she’s seizing a 51-percent share in the YPF oil company from its Spanish owner Repsol.

You Might Also Like

By eurozone standards, Spain’s public debt does not look so bad. At 66 percent of gross domestic product, it’s less than that of virtuous Germany and way lower than Greece at 150 percent or Italy at 119 percent.

Spain’s problems lie elsewhere. The collapse of a 2000s housing boom plunged families and banks into deep trouble. Household gross debt, which averaged 80 percent of income in the decade up to 2007, is now up at 126 percent.

Spanish unemployment is the highest in the eurozone, at almost a quarter of the workforce, and double that in Spaniards under 25 years of age. The economy is set to shrink this year and the country’s powerful regional governments are resisting Rajoy’s belt-tightening demands.

“We should be worried,” says Brzeski. “That does not mean that they are falling off the cliff or requiring an imminent bailout, but if you look at the combination of weak macro fundamentals, the still falling real estate market, high deficits, it looks increasingly likely that they will at some point in time need European support.”

Based on the bailouts of Ireland and Portugal, a rescue plan for Spain could cost the EU around 300 billion euros ($394 billion) over three years. That just about could be covered by the 800-billion-euro ($1-trillion) firewall that the EU hopes to have in place by the summer, but without leaving enough leftover if Italy gets into trouble.

A cheaper option, and one that would save Madrid the ignominy of handing over the running of its economy to the EU and IMF, could be a loan from the firewall fund to help Spain recapitalize its banks.

Neither solution tackles what many believe to be Spain’s fundamental problem: how to revive growth so that unemployment lines start to come down and home prices rise. Until that happens the risk of Spain’s economic malaise spreading will remain.

More Related Stories

Featured Slide Shows

  • Share on Twitter
  • Share on Facebook
  • 1 of 13
  • Close
  • Fullscreen
  • Thumbnails

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    DAYA  
    Young Daya has yet to become entirely jaded, but she has the character's trademark skeptical pout down pat. And with a piece-of-work mother like Aleida -- who oscillates between jealousy and scorn for her creatively gifted daughter, chucking out the artwork she brings home from summer camp -- who can blame her?

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    MORELLO   
    With her marriage to prison penpal Vince Muccio, Lorna finally got to wear the white veil she has fantasized about since childhood (even if it was made of toilet paper).

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    CINDY   
    Cindy's embrace of Judaism makes sense when we see her childhood, lived under the fist of a terrifying father who preached a fire-and-brimstone version of Christianity. As she put it: "I was raised in a church where I was told to believe and pray. And if I was bad, I’d go to hell."

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    CAPUTO   
    Joey Caputo has always tried to be a good guy, whether it's offering to fight a disabled wrestler at a high school wrestling event or giving up his musical ambitions to raise another man's child. But trying to be a nice guy never exactly worked out for him -- which might explain why he decides to take the selfish route in the Season 3 finale.

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    BOO   
    In one of the season's more moving flashbacks, we see a young Boo -- who rejected the traditional trappings of femininity from a young age -- clashing with her mother over what to wear. Later, she makes the decision not to visit her mother on her deathbed if it means pretending to be something she's not. As she puts it, "I refuse to be invisible, Daddy. Not for you, not for Mom, not for anybody.”

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    SOSO
    We still don't know what landed Brooke Soso in the slammer, but a late-season flashback suggests that some seriously overbearing parenting may have been the impetus for her downward spiral.

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    POUSSEY
    We already know a little about Poussey's relationship with her military father, but this season we saw a softer side of the spunky fan-favorite, who still pines for the loving mom that she lost too young.

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    PENNSATUCKY
    Pennsatucky had something of a redemption arc this season, and glimpses of her childhood only serve to increase viewer sympathy for the character, whose mother forced her to chug Mountain Dew outside the Social Security Administration office and stripped her of her sexual agency before she was even old enough to comprehend it.

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    CHANG
    This season, we got an intense look at the teenage life of one of Litchfield's most isolated and underexplored inmates. Rebuffed and scorned by her suitor at an arranged marriage, the young Chinese immigrant stored up a grudge, and ultimately exacted a merciless revenge.

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    HEALY
    It's difficult to sympathize with the racist, misogynist CO Sam Healy, but the snippets we get of his childhood -- raised by a mentally ill mother, vomited on by a homeless man he mistakes for Jesus when he runs to the church for help -- certainly help us understand him better.

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    NORMA
    This season, we learned a lot about one of Litchfield's biggest enigmas, as we saw the roots of Norma's silence (a childhood stutter) and the reason for her incarceration (killing the oppressive cult leader she followed for decades).

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    NICKI
    While Nicki's mother certainly isn't entirely to blame for her daughter's struggles with addiction, an early childhood flashback -- of an adorable young Nicki being rebuffed on Mother's Day -- certainly helps us understand the roots of Nicki's scarred psyche.

  • Recent Slide Shows

Comments

0 Comments

Comment Preview

Your name will appear as username ( settings | log out )

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>