Once again, a credit-ratings agency has confirmed what most investors already knew. Last week, Standard & Poor’s (S&P) lowered its assessment of Spanish sovereign debt by two notches. It noted that Spain was highly unlikely to meet its deficit-reduction target, while Madrid might need to provide further support for the banks.
This is “a narrative all too familiar to investors”, says Lex in the Financial Times. Spain is in its second recession in three years: the economy has shrunk over the last six months. Austerity is exacerbating the downturn, making it all the more difficult to cut the annual deficit and thus get the debt pile under control.
Spain is supposed to reduce its annual overspend, or budget deficit, from 8.5% of GDP to 5.3% this year. But it’ll be lucky to reach 6.2%, reckons S&P. “Spain must run ever harder just to stand still,” says Alistair Osborne in The Daily Telegraph. The population’s tolerance for further harsh measures is dwindling. Unemployment has reached almost 25%.
And where does Madrid find more money to prop up its banks? wonders Osborne. It is holding around €50bn in reserves to cover potential losses, while an estimate by think tank Open Europe suggests that around €80bn of loans to the property and construction sectors look “toxic”.
With the economy tanking and the property bubble still hissing air – some analysts reckon prices could fall by another 30% or so – more bad loans, especially in residential mortgages, are in the pipeline. Overall loan delinquency has risen above 8%, an 18-year high.
To make matters worse, banks have taken on more potentially dodgy loans of late by hoovering up government bonds using the European Central Bank’s low-cost loans. That has simply made them more vulnerable to an eventual default. “It’s not hard to imagine a transfer from private to public-sector debt rapidly blowing the sovereign debt ratio toward 100% of GDP [from a mere 68% now],” says The Wall Street Journal’s Vincent Cignarella.
Investors are also sceptical as to whether Spain’s central government will be able to ensure that the country’s largely autonomous regions truly rein in spending. Spain insists it doesn’t need a bail-out, but now that “the wheels are very clearly coming off”, as David Owen of Jefferies puts it, it’s likely to be a question of when and how, not if.