After reviewing Spain’s 5 toxic mix of 5 serious economic problems, what are the prospects for the euro-zone’s fourth largest economy?
Austerity can please the markets for a short period of time, and help reduce the debt recycling costs. The debt factor in the debt to GDP equation falls. However, when it causes a lower output, also the GDP factor falls and the ratio rises once again.
On one hand, the government has an absolute majority and still has a strong mandate from November’s elections. It also showed that it can say No to Brussels, at least partially.
On the other hand, the serious problems that Spain has are huge. It will probably get worse before it gets better.
ECB Help?
Spain may eventually get some help from the ECB, but not via a third LTRO. The ECB still has the SMP program it already used in the past for Spain. Mario Draghi might use this scheme in order to prevent very high yields, but isn’t likely to use it to send yields back to 4%.
The ECB actually has an interest to see higher yields: this puts pressure on the governments to act for a reform. Some say that without such pressure, Spain will not act.
Will Spain ask for a bailout? Not in the near future. Given the speedy funding it made at the beginning of the year, it can still muddle along and pay higher prices in the primary market before crying for help.
Will Spanish problems weigh on the euro? Certainly. They already do, and it will likely get more serious. Spain has so much to sort out, that it will likely stay in the news and hurt the euro for a long time. Spain definitely needs a weaker euro for its exports and for attracting tourists, paradoxically, Spain’s troubling headlines indirectly help it.
In the near future, Spain’s issues alone aren’t likely to send the euro below the range. However, a break down can happen together with other issues, led by Spain.
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