Working off S&P’s recent two-notch downgrade of Spain‘s credit rating, PIMCO’s Mohamed El-Erian says the country needs to implement crucial reforms and needs more targeted help from Europe. In an editorial in the Financial Times, El-Erian says three things needs to happen for Spain to turn things around. First he says, Spain needs structural reforms aimed at economic growth and job creation.
Second, he thinks Spain needs to reduce worries* about the impact that potential liabilities in its banks (because of its real estate bubble) could have on government finances by acting to consolidate its banking sector.
Finally, El-Erian writes says Europe needs to offer Spain more targeted help:
“Europe needs to be more willing and able to support Spanish adjustment efforts. As currently set up, European mechanisms for exceptional financing assistance are overly binary – either way too little assistance or, at the other end, a full blown rescue package that brings with it the risks of collateral damage and unintended consequences.
Existing procedures make it difficult for Spain, if not impossible, to receive targeted official financing without also signaling that it is becoming a ward of the European state. As such, rather than complement a market-financed adjustment program, recourse to European emergency funding could result in Spain foregoing virtually all access to private financing (as is the case today for Greece, Ireland and Portugal).”
* A previous version of this article erroneously stated that Spain needed to worry less about potential liabilities in its banks.