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Will Spain go the Greece way? International investors wary

Last Updated: Sunday, April 15, 2012 - 22:36

Madrid: Spain has become the latest country caught up in the government debt crisis crippling Europe, sparking fears that it'll join Greece, Portugal and Ireland and go asking for an international bailout.

Over the past week, investors have grown increasingly wary of buying Spain's debt on the international bond markets, sending the country's cost of borrowing to highs not seen in nearly four months and its stock markets plummeting.

In reality, worries about Spain have always been there. Bond market pressure on Spain began seriously to mount in 2011 as the country's deficit and unemployment rocketed.

But late last year, two factors helped ease this pressure. First, Mariano Rajoy's right-wing and pro-austerity Popular Party took over the reins after winning general elections in November. But of much greater impact was the European Central Bank's decision to flood the region's financial system with more than (euro) 1 trillion (USD 1.3 trillion) in bargain loans to banks. The injection spurred lenders to snap up battered government debt, driving Spanish borrowing costs down. However, the effects of the cheap loans across Europe have since dissipated and Spain is taking the brunt of market distrust.

Rajoy's administration faces two big tasks: resurrecting an economy with 23 percent unemployment by creating jobs while trying to reduce its deficit to satisfy EU overseers and international investors via austerity measures. To help them achieve these, the government has already imposed draconian spending cuts as well as introducing labor market and banking sector reforms.

Meanwhile, Spain's banks are saddled with huge amounts of toxic real estate loans and some of the country's regional governments have spent way beyond their means.

Rajoy has warned voters that Spain is in for a rough ride, acknowledging that things will get a lot worse before they get better. With one hand, the government is draining money from the economy as it tries to cut its deficit via austerity cuts. With the other, it is attempting to lay the foundation for a more efficient economy by, for instance, rewriting rigid labor laws to encourage companies to hire once Spain and Europe recovers.

The eurozone has recently increased the size of its financial firewall to help out its members should they fail to raise money from the markets. But Spain's (euro) 1.1 trillion (USD 1.45 trillion) economy is twice the size of the previous three bailout victims put together. Analysts are worried the eurozone's (euro) 800 billion (USD 1.05 trillion) firewall is not large enough to deal with the potential threats coming from Spain and other indebted countries such as Italy.

Bureau Report

First Published: Sunday, April 15, 2012 - 22:36
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