Investor angst is returning to the eurozone. Now Spain could be heading for default. Yields on Spanish ten-year debt have jumped from 5% to 5.5% in the past month.
European leaders are to agree on topping up Europe’s bail-out fund at a meeting today. The European Commission wants to create a €940bn firewall by merging the new permanent bail-out fund, the European Stability Mechanism – to be introduced in June – with the current temporary fund, the European Financial Stability Facility.
What the commentators said
However you slice and dice the potential rescue fund numbers, with Germany looking unlikely to make major concessions (which would in any case be very hard to pass in parliament), “everybody knows it’s not going to be big enough”, said Citigroup’s Robert Crossley. The optimistic estimate of €940bn pales against Spain and Italy’s financing needs of more than €1.2trn over the next two years, said The Wall Street Journal. This week’s discussion “looks a lot like deckchair management”.
Meanwhile, Europe’s darkening economic prospects are also undermining confidence. Last week’s fall in a survey covering both services and manufacturing suggests that the economy shrank for a second successive quarter between January and March 2012.
Recession makes resolving the debt crisis far harder, as without growth, economies can’t get debt under control, said Economist.com. “If output is shrinking and unemployment rising, then austerity measures are likely to make economic conditions worse.” So the debt gets worse too. All the European states that have got into trouble suffer from this vicious circle.
Enter Spain. The economy is now in its second recession since the financial crisis, unemployment is at 23% and the government is supposed to cut the budget deficit by a colossal 3.2% of GDP between 2011 and 2012. Given the debt trap described above, it’s no wonder some economists are calling this “mission impossible”.
To make matters worse, the state “may need to spend billions of euros more on rescuing zombie banks”, said Victor Mallet in the FT. Nobody believes that the banks have faced up to all their losses after the property bubble collapsed. The government will also struggle to rein in spending by largely autonomous regional governments, “a central cause of last year’s budgetary overshoot”, noted Tobias Blattner of Daiwa Capital.
Throw in ongoing protests against austerity and it’s clear why more and more analysts think Spain is set to default. Spain is being plunged into depression, said Mark Dittli in Switzerland’s Finanz und Wirtschaft. Let’s hope it’s still “a functioning democracy” when all this is over.