This year has been a rude awakening for the European Union, with emergency bailouts for Greece, Ireland, as Belgium and Portugal await a similar fate. The debate is now focused on Spain; to bailout or not to bailout, that is the question. Ted Scott, Director of UK Strategies at F&C Investments, was reported as saying “Spain is too big to bailout”(CityWire, 2010). Now that’s a switch - in this country we’ve heard the phrase “Too big to fail” more often than we wanted to. So what are the factors that render Spain too far gone, or is it? Well for starters, Spain’s economy is the fourth largest in the Union, larger than Greece, Portugal and Ireland put together, representing 11.5 percent of the European Union’s GDP. It has the third largest deficit in the Union, estimated at over 400 billion Euros. which is significant. Increasing fears of instability is reflected in the upward spiraling interest rates investors have imposed on Spain's bonds. Unlike Ireland’s debt crisis, 50% of Spain’s debt is held by international investors, so although the impact of defaulting will send trimmers across the globe, the domestic investors will be more forgiving, and continue to purchase Spain’s bonds.Surprisingly, the government of Spain believes that there will be no need for external assistance.
Spain’s Prime Minister, Jose Luis Rodriguez Zapatero, warns international investors that they will lose money betting against his nation’s debt. To his credit, the Prime Minister has implemented aggressive austerity measures in an effort to avoid the need for a bailout, through tax hikes and spending cuts for this year and 2011. Unfortunately analysts are not as confident as the Jose Luis Rodriguez Zapatero, that these measures will be sufficient to ward off IMF intervention. To stay afloat the government of Spain and its banks have to raise upwards of 300 billion euros. Given the recent Moody’s rating downgrade, prompting steep interest rate increases on Spain's bonds, many analyst believe it’s simply too late for Spain to successfully climb out of the hole. Defiant and independent, Spain is conducting a series of bond auctions, while counting on budget cuts and the continued domestic appetite for its bonds as a firewall against external intervention from the IMF. That sounds good, all tied up into a neat little financial bow, but is it realistic? Given Cohn-Reilly Report's "EU Financial Crisis" article addressing the European Union members' exotic accounting maneuvers to hide borrowing, it is hard to keep a positive outlook on Spain’s ability to emerge from this crisis without external financial help. I wont bet against Spain, but I'm not looking to purchase their bonds either. Nevertheless, I do hope the Prime Minster achieves his objective - against all odds
K. Reilly
Cohn-Reilly Report
___________Comments
sinaj norrab said...
It seem that the eurpoean union have their work cut out them. This is like waht we have been going through for the past two years. One thing after another, with the Bank and auto makers bailouts, followed by housing crisis and foreclosure fallout. it did not help that the finance fraud and scams seemed to be the icing on the cake. Gloabally, we are all in trouble. Is there any hope that 5 years from now everything will be okay?
It seem that the eurpoean union have their work cut out them. This is like waht we have been going through for the past two years. One thing after another, with the Bank and auto makers bailouts, followed by housing crisis and foreclosure fallout. it did not help that the finance fraud and scams seemed to be the icing on the cake. Gloabally, we are all in trouble. Is there any hope that 5 years from now everything will be okay?
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