“Brussels needs to put the pizza-delivery companies on notice,” says Fxpro.com: expect “plenty of all-night…summits” about Spain in the near future. It looks set to become the fourth eurozone state to need a bail-out. The yield on Spanish ten-year government debt – the implied cost of borrowing for ten years – has risen to increasingly unsustainable levels of around 6.5%.
The main worry for investors is that the government will have to bail out the banks and will bankrupt itself in the process. Last Friday it emerged that sector heavyweight Bankia would need another €19bn in government aid. That’s on top of the €4.5bn the state has already had to pump in to cover likely losses on repossessed property, loans and investments. With the markets already panicking about Spain’s debt, the government could have trouble raising the money on the debt markets.
The sum likely to be required by the banking system has continually been revised upwards. So nobody believes the banks have yet come clean on their likely losses – especially as air continues to hiss out of the property bubble.
According to Barclays Capital, house prices will fall by another 20%. Bad loans have risen to an 18-year high as the economy falls deeper into recession. One think tank reckons write-offs could reach €270bn. “This implies ‘Irish’ damage to Spain’s debt trajectory” as the government picks up the tab, says Ambrose Evans-Pritchard in The Daily Telegraph. Public debt could surge into triple figures (from 80% now).
Meanwhile, Spain’s largely autonomous regions are in trouble. Due to their overspending, last year’s budget deficit has been revised up from 8.5% of GDP to 8.9%. Now Catalonia says it will run out of cash very soon. Again, there is scant scope for the central government to shore up the regions.
The overall backdrop is “a vortex of debt-deflation”, say Evans-Pritchard. A nasty fiscal squeeze to curb debt is exacerbating the recession, which in turn is raising the debt level as a proportion of GDP. Trapped in the euro, Spain can’t devalue, cut interest rates or print money to cover its debts. So even a rescue package would merely alleviate Spain’s pain rather than solve the underlying problem, which is that Spain is “quite simply in the wrong currency”. No wonder talk of returning to the peseta is spreading.