Watching Spain (Uneasily)

by Andrew Stuttaford

Via the Daily Telegraph:

European finance ministers are gathering again to resolve the advancing debt crisis, but, despite international demands for action, the draft document is pointing to another dangerously damp squib.

Spain is the big worry: it’s raced to the head of market fears – as well as the political agenda – with alarming speed.

International leaders and traders are now watching in horror. The tightrope [Spanish prime minister]  Rajoy is trying to walk between austerity and human costs is the fault line dividing the whole of Europe. On one side there’s the German-led plan to forcibly reduce debt by axing public spending, raising taxes and executing structural reforms; on the other is a demand for more support of the sinner states to avoid depression and anarchy.

But with hopes fading that massive support will be agreed in Copenhagan, the world is watching Rajoy instead. Can he turn around Spain’s economy alone?

Friday’s Budget is a vital test. Earlier this week, Rajoy promised a “very, very austere budget”. He was backed by Cristobal Montoro, the Budget minister, who said the Budget was “tough”.

Over the 100 days they’ve been in power the pair have proved their mettle, pushing through a raft of radical reforms from axing severance pay to overhauling contract laws, and announcing sweeping cuts to the public sector. After Friday, Spain is expected to attempt €35bn of cuts, on top of the €8.9bn already budgeted, as well as €6bn of tax rises.

But, in a country whose regions hold considerable power, passing reforms are very different to implementing them. On Sunday, Rajoy’s PP party failed to win control in the crucial Andalusia elections, leading to warnings that his austerity measures would struggle in the regions.

Spain’s banks are more critical still. Rajoy has overseen some consolidation and has demanded the banks come up with a €50bn recapitalisation programme by the end of March. A European Commission assessment this week suggested it would be woefully inadequate, even if it were successful.

On top of the current debts, the banks – which lent billions of euros during the property boom – stand to suffer more as Spain’s housing market continues to fall.

Citgroup’s Buiter said: “New property and real estate-related losses are likely to come their way as a result of further property price declines. The Spanish banks are unlikely to be able to absorb these losses. If these institutions are deemed too important to fail, these losses could migrate to the public sector, which could have severe problems carrying them.”

Experts have called for the bail-out fund, the European Finacial Stability Fund, to be used to help recapitalise the banks, if not the country.

And then there’s Portugal

Was it only yesterday that Italy’s prime minister announced that the crisis was “almost over”?

Why yes it was. .

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