By Barbara Zigah
The Euro continues to be under significant pressure, in spite of the recent Irish bailout package, today EUR selling at $1.2997, near a 10-week low. Further, the threat to Portugal’s economy looms large among investor concerns. In reality, that’s nothing when compared to the worries emanating over Spain’s fiscal crisis. The Spanish economy, in comparison to that of Greece, Ireland and Portugal, is twice as large, thus twice as important to the Eurozone’s recovery. Of the 16 sovereign nations that make up the common currency Euro, Spain’s is the largest at 12% of economic output. Last week, the price to hold Spain’s debt rose to record levels as investors demand a higher premium for the risk involved; the spread between German and Spanish 10-year notes surged to 2.51% at one point, before settling back to 2.36% yet only a few short months ago, the gap stood at 1.70%.
The Spanish Finance Minister is doing her best to calm investor concerns, insisting that the economic reforms and austerity measures they’ve enacted are helping, and that ultimately Spain won’t need assistance. Those arguments sound remarkably like others we’ve heard from the Irish government. Spain’s economic future looks bleak, with 20% unemployment and no economic growth to speak. Markets fears are not being assuaged, not when bond spreads continue to widen and the Euro continues to weaken. Again, just like Ireland, it’s only a matter of how long the market has to wait before they acknowledge that there’s a problem.
Should Spain require a bailout, too, then it’s conceivable that the funds earmarked for bailout purposes by the European Union and International Monetary Fund will be inadequate to support it, as it could be as much as €500 billion. And it is appearing more and more likely that a bailout may be needed, as worries over the Spanish banking sector are reemerging. Recall, if you will, that only a few months ago Spanish banks were subjected to a stress test, the results of which were generally positive, with all major banks passing, and only a handful of the 19 regional lenders not meeting the criteria. Recall, too, that Irish banks were put to the same test, and likewise passed with flying colors… yet the Irish banking system is about to get a hefty injection of help. Certainly, that raises questions about the value of the stress tests. The Spanish central bank announced that a 2nd round of bank stress tests would be undertaken next spring. Can Spain hold out that long? Can the Euro?
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