Whatever happens to Greece, markets “will soon turn their icy gaze” to other vulnerable European economies, says the FT’s Victor Mallet. Enter Spain, which is set to be “the real test case for the euro”, as Desmond Lachman of the American Enterprise Institute puts it. It is too big to bail out and nobody thinks the government “has the will or the ability” to push through its plan to cut its deficit from 11.4% of GDP to 3% in 2013, says Mallet.
A particular worry is the banking system. The private sector went on a housing and credit binge. According to McKinsey, total public and private debt hit 342% of GDP, with the private sector accounting for around 85% of the total.
Non-performing loans have risen to 5%, thanks largely to the construction bubble imploding, although Credit Suisse reckons the true figure could be 30%-40% higher, notes Stephen Fidler in The Wall Street Journal. Major losses at savings banks are on the cards and government money is likely to be needed to shore up banks, adding to public debt.
With deleveraging far from over, it’s hard to see Spain growing its way out of trouble. And with unemployment already at 20%, confidence in its ability to withstand the deflation required to become competitive again is hardly sky-high. “Spain is in deep trouble”, says Lachman. “It will be difficult to hold the euro together.”