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| Spain (Photo credit: robynejay) |
As the International Monetary Fund pointed out this past week in its updated economic outlook, that is extraordinary unlikely. In fact, the IMF now sees an “alarmingly high” risk of a global slowdown in 2013. By holding out on accepting the help of the European Union, and by extension the European Central Bank, Spain is playing with fire and hoping the market’s patience doesn’t run out. It likely isn’t a risk worth taking.
Spain’s TribulationsSpain’s economy is in real trouble. The IMF expects gross domestic product to contract by 1.5% and 1.3% in 2012 and 2013 respectively, assuming everything goes to plan and there are no external shocks. Growth could be much worse. Unemployment looks set to remain stratospheric at more than 25%. The country is trying to bring budget deficits under control, but it keeps missing targets as revenues fall short of expectations and cuts are harder to execute than expected. The housing market remains deeply troubled. Banks are going to need a huge amount of capital to stay afloat. Political protests and talk of regional secession are becoming the norm rather than the exception. The only plausible way out of the mess is going to be through a lifeline from the rest of Europe.
This is not to say that Spain is a lost cause. The country’s debt/GDP ratio remains under 100% (though that number will likely rise quickly if bank bailouts are placed on the Spanish sovereign balance sheets) and the adjustments the country needs to make are much less severe than, say, those that Greece has to undertake.
But Spain is not out of the woods, yet, either. Given the issues facing the country, Spain is not going to have a primary budget surplus anytime soon, even in the rosiest projections. That means the country will need access to the bond market to both refinance existing debt and to finance new spending. If yields on Spanish debt are elevated, then debt service becomes very expensive and makes the fiscal problem even worse. This can quickly create a vicious cycle, sending rates even higher and making it that much more challenging for the country to refinance its debt load.... Continue to read.
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