Tuesday, May 22, 2012

Spain In Pain, What Next?

Just a year ago when the eyes looking at Europe shifted their focus on Italy and Spain, the later was dubbed to "big to fail." Today Spain is withering in sharp pain. Since the global banking crisis of 2008, there have been four attempts by the Spanish government - two by the current one, two by its predecessor - to shore up a banking system seriously weakened by reckless property and construction loans.

The ratings agency Moody's recently cut the credit ratings of 16 Spanish banks, a further blow to a country that is struggling to deal with the bad debts of its banking sector. Ten of the 17 banks were also put on negative credit watch, meaning that further downgrades are possible. It also cut the debt rating on Santander UK, a subsidiary of the Spanish banking giant. This comes after shares in struggling lender Bankia have almost halved in value this month. Fears about losses at Spanish banks have hit markets all across Europe.

In Spain the number of unemployed people reached 5,639,500 at the end of March, the unemployment rate stands at a staggering 24.4%, the national statistics agency said. These figures came just hours after rating agency S&P downgraded Spanish sovereign debt. The National Statistics Institute said the economy shrank 0.3% over the three months to the end of March, the second consecutive quarterly contraction. The only good news is that the contraction was not quite as much as economists had been expecting.

Concern over the weakness of the economy and the deficit have driven up the cost of borrowing for Spain, raising fears it will need a bailout. All this is occurring as tens of thousands of protesters hit the streets voicing opposition to planned cuts in healthcare and education. The cuts are part of the government's effort to reduce the public deficit to to 5.3% of gross domestic product in 2012, from 8.5 percent last year. But that effort is being hampered by the lack of growth. That prompted the Foreign Minister Jose Manuel Garcia-Margallo to say: "The figures are terrible for everyone and terrible for the government... Spain is in a crisis of huge proportions."

Guillaume Menuet, an economist at Citigroup, said: "Spain's still very much in recession and we think that this isn't going to improve soon." Spain's performance contrasts with Germany, which on  announced that retail sales had risen 0.8% in March. It's likely that Spain faces more fiscal tightening  if they wish to avoid going into a bailout plan. The problem is Spain is more like that of America where massive over building occurred, this differs from Greece, where government overspending created massive debt. The only thing that is certain for Spain, more pain lies ahead.

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