5 Reasons Why Everyone Is Panicking About Spain

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Photo: Esperanca91 via YouTube

Concerns surrounding Spain’s fragile economy remain elevated.  Following a challenging bond auction this morning, sovereign borrowing costs surged.Despite Friday’s call for banks to set aside an additional €30 billion to cover real estate losses, many are freaking out about Spain.

Societe Generale economics team led by Philipe Meyer is out with a report that points out 5 signs that Spain has become seriously worrying.

A fragile economy: Unemployment, house prices and GDP are all sending worrying signs

Spain now has an unemployment rate of 25 per cent, which is double the 2008 level. Because of the high level of household debt home prices are falling which hurts domestic demand, GDP, and family wealth.

Source: Societe Generale

A fragile banking system: The government may need to inject more money into the system

Using the ECB's long-term refinancing operations (LTROs) Spanish banks have taken on government debt since the start of the year. The banking sector however is fragile and banks' bad loan ratio is at a record high.

Latest data shows that Spanish bank borrowing from the ECB in April hit a record high, rising to a record €263.5 billion or 14.5 per cent of GDP

Earlier this year the government asked its banks to set aside €50 billion to cover real estate losses and last week, it asked banks to set aside an additional €30 billion. The government had already bailed-out Bankia and could inject €15 billion into banks if they can't meet these provisions requirements.

Source: Societe Generale

A fragile sovereign state: The country is likely to miss its deficit target this year

While Spain said it has covered 53 per cent of its bond issuance for the year, the European Commission said it is likely to miss its 5.3 per cent budget deficit target.

Source: Societe Generale

Spain is still on the radar of ratings agencies

Moody's has said that Spanish banks are vulnerable even after the €30 billion in provisions that was just announced.

For now Moody's has Spain at A3 (downgraded by two notches in March) and S&P has Spain at BBB+ (downgraded in April, with a negative outlook).

Source: Societe Generale

Uncertainties around Spain are seeing its borrowing costs rise

Uncertainties about Spain's ability to finance itself in coming months and the risk of contagion from a Greek exit are showing in the Spanish bond markets.

This mornings Spanish's auction saw borrowing costs climbed and demand miss the maximum target. Moreover, yields on the 10-year Spanish bono were at 6.20 per cent today and 5-year CDS is also at record levels.

Source: Societe Generale

Now here are other things in Europe that you should be worrying about...

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