Photo: Wikimedia Commons
Spain has quickly gone from a background worry to an immediate concern, as its banking sector struggles to stay afloat under the weight of more and more troubled loans.Meanwhile, the Spanish government is paying more and more to borrow, and investor concerns once again threaten a liquidity crisis.
That leaves Spain in an ominous situation. We dive deeper into the details.
Of all €323 billion ($422 billion) in assets linked to loans from developers, some €175 billion ($229 billion) are considered 'troubled' by the Spanish government.
Societe Generale analyst Michala Marcussen wrote that home prices will likely fall another 15 per cent in the 2012-2013 period. They have already dropped 25 per cent from their peak.
Citi's Willem Buiter argued in a similar note that the decline in Spanish land and property prices is probably less than halfway complete. He ultimately expects them to drop 60 per cent from their peak.
Manufacturing is unlikely to dig the country out of recession. Its manufacturing purchasing managers' index in April came in at 43.5--the worst reading since June 2009--signaling a 'marked deterioration in operating conditions.'
The Spanish government has passed the most severe austerity budget since it transitioned to democracy 30 years ago.
That will include €27 billion ($35 billion) in cuts from the central government's budge, funding cuts of 17 per cent for Spanish ministries, and a freeze on civil servant wages.
Bloomberg reports that Spanish PM Mariano Rajoy unveiled a new round of €10 billion ($13 billion) in cuts to basic government spending on April 10.
Investors predict that the failing Spanish bank Bankia is the first of many to need a bailout from the central government.
J.P. Morgan's David Mackle wrote recently:
Crisis management is all about burden sharing: who bears the cost of prior mistakes. Spain looks to have gotten to the point where it cannot bear the burden alone. The Spanish government recognises the need for burden sharing, but it does not want the kind of burden sharing that was made available to Greece, Ireland and Portugal. The Spanish government wants the ECB to directly purchase its sovereign debt and for the EFSF/ESM to directly recapitalise its banks.
It is now shooting for a total budget deficit equal to 5.3 per cent of GDP this year and 3.0 per cent in 2013. It had to revise targets higher for 2012 from a goal of 4.4 per cent EU leaders had previously demanded.
Source: The Economist
According to RTE News, the Spanish government said it will approve the issuance of 'hispanobonos,' bonds issued jointly by Spain's 17 autonomous communities, in order to reduce funding costs for troubled regional governments.
Last week, Moody's downgraded the long-term issuer ratings of four Spanish regions--Extremadura, Murcia, Andalucia, and Catalunya--because of 'poor fiscal performance in 2011 and the low probability that the regional governments will be able to meet the 2012 deficit target set by the central government.'
Borrowing costs are shooting higher, hitting levels not seen since before the European Central Bank offered the first of two three-year LTROs in December.
While the government has already issued 55 per cent of the debt it will need to finance spending this year, trouble could still be in store for the government.
Spain will need to roll over €117.5 billion euros of Spanish debt maturing this year, with the bulk of that coming due in October, November, and December. It also has to finance a €52 billion deficit.
Issuing this debt will become much more difficult if the government continues to pay through the nose to borrow. And new debts incurred by bank bailouts could increase the amount of debt left to issue--and inflate investor concerns about the Spanish government's inability to pay back its debts.
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