Crunch time for Spain


Jeremy Weltman
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Spain’s ECR score has continued to fall in recent days, as confidence in the sovereign’s ability to resolve its debt problems continues to be undermined by its economic woes and uncertainty over the precise terms of a €100 billion bank bailout agreed at the EU summit.

As the chart (below) indicates, Spain’s increased risk is evident in a trend decline in the sovereign’s ECR score, which has fallen by 5.2 points since January to 58.8, and by 7.7 points compared with a year ago. It has taken the country down to 42 in the global rankings, one place below Italy and two below Colombia.

Spain’s benchmark 10-year bond yield was hovering just above the critical 7% level at the close of trading on Monday. All of the country’s economic assessment sub-factors have been downgraded this year; ECR contributors have also become concerned by institutional risk, the possibility of government non-payment/non-repatriation and labour market/industrial relations in Spain.

The European Commission (EC) has signalled that the bank bailout will be drip-fed, as €30 billion of financing makes its way to Madrid from the euro’s emergency funding at the end of this month.

The EC is also prepared to give the centre-right government more time to meet its budget deficit targets. Instead of reducing the general government (EU) deficit to 3.5% of GDP by end-2013, the EU – subject to cross-country consensus – is to raise the target to 4.5% under the proviso it would then decline to 2.8% by the end of 2014.

However, preliminary results of Monday’s Euro Zone Barometer poll by MJEconomics, a survey firm, indicate waning confidence in the government’s ability to meet even this new target without economic improvement.

And Spain’s economic outlook is particularly bleak. A 1.7% contraction of real GDP is predicted by Euro Zone Barometer for 2012. Plus, following downgrades to experts’ predictions this month, a 1% decline is the average forecast for 2013 – one bank is predicting it could be much worse next year, with a decline of 2.2%.

It is no coincidence that Spain has seen one of the largest falls in its ECR economic assessment scores among western European countries during the past 12 months, with contributors providing an early pointer to the country’s problems.

However, where does Spain go from here?

Roberto Cervelló-Royo, assistant professor at the Universidad Politécnica de Valencia, and one of ECR’s Spanish contributors, states:

“The European crisis and the bursting of the Spanish real-estate/property bubble have shaken confidence, not only in Spanish public debt but also in the country’s economic situation. However, ordinary Spaniards had little to do with creating the problems, and austerity is not the way out of it.

“Spain has turned out to be the real Achilles’ last stand of Europe. Europe has to play a main role in this situation and to decide if they want to go on with the euro or not. All this involves investment and access to capital.

“Despite the resistance of some northern and continental European countries, a growing trend argues that one of the possible solutions must entail loosening monetary conditions by cutting interest rates and printing money to buy bonds on the one hand, but, on the other – and in the long-term – the well-known Eurobonds or some form of joint liability for countries’ debts might also be considered.”

This article was originally published by Euromoney Country Risk