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Spain, the next to watch

Spain may be the next victim of bearish investors in the eurozone bond markets because of its difficulty in meeting deficit reduction targets, weak economy and struggling banks, according to economists and analysts.

UBS said it was increasingly concerned about Spain for three reasons: first, slippage in deficit reduction plans (the European Commission said on Thursday it expected the deficit this year to be 6.6 per cent of gross domestic product rather than the targeted 6 per cent); second, the possibility of a deep recession; and third, plans to help banks that could mean “a surge of liabilities being transferred to the government balance sheet”.

Spanish politician Elena Salgado.

Spanish politician Elena Salgado. (Photo credit: Wikipedia)

Jamie Dannhauser of Lombard Street Research said Spain is more at risk than Italy.  According to him, although Spain’s stock of public debt was relatively small – below Germany’s as a share of GDP, let alone Italy’s – the country is nowhere near running a primary budget surplus and its private sector debt is burdensome. That affects the banks, and the potential losses on bank assets are “a massive contingent liability of the state”.   “It is the downward spiral between private debt, fiscal consolidation, low growth and banking solvency that really threatens countries in the [eurozone] periphery.”

On 2011-11-11, friday, Spain’s National Statistics Institute said economic growth in the third quarter of this year was zero compared with the previous quarter. The economy expanded 0.8 per cent compared with the same period of 2010, but Spain is now unlikely to come close to the 1.3 per cent growth for this year forecast by the government and could fall into recession early next year.

Nonetheless, according to Elena Salgado, finance minister, Spain is ‘safe’ for now.  But the question is whether Spain’s Socialist government can retain the confidence of the markets until the election on November 20, and whether the new government, likely to formed by the centre-right Popular party, can continue to do so.

Reference:  Financial Times, 2011-11-11, “Spain seen as next eurozone victim by analysts”