Spain, one of the worst victims of the eurozone crisis, is struggling to find buyers for it’s debt. It needs to borrow money to keep the economy afloat, but the price for the country’s bonds is falling for obvious reasons. And this means higher borrowing costs, which can cause serious trouble in the long run. Mariano Rajoy, Spain’s Prime Minister, is fighting to avoid a total government bailout.
Spain needs to pay about 7% interest to borrow from the secondary market, where bonds are traded. This rate can weigh on the country and will result in fewer funds for investment. To put it more clearly, it will choke off growth due to the austerity policies that Spain would need to implement to save money.
At the moment, Spain may not face the risk of immediate bailout for it has managed to sell off 72% of its long term debt. Also, European Central Bank’s €1 trillion low rate loans have helped Spanish Banks to buy up debts in the country. Nonetheless, Spain’s future doesn’t look too bright.
Unemployment rate in Spain has reach almost 25%. The situation is worse than any other eurozone country. Secondly, public sector debt is increasing at a steady pace and might go out of control pretty soon. Thirdly, Spain’s budget deficit is about 9%, though the target is 3%. Fourthly, the country’s banks are about to lose €176 billion in bad real estate loans. This threatens to be a major setback.
To make things worse, the EU leaders continue to have debates on the best possible way out of this situation. Unfortunately, no one seems to agree with the other.
Rajoy is trying to get things under control by introducing tax hikes and spending cuts. But the fear of public unrest will definitely refrain him from making tough decisions in quick succession. This is a major concern as time is running out for Spain. It’s gross financing needs through the next couple of years, as per IMF, stands at €360 billion. Most financial analysts believe that Spain has no more options than to wait for ECB or EU to make a major move.
Author Bio:
Debasubhra Banerjee is an Associate with a Big Four professional services firm.