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Viva Espana? International investors not so sure

By Daniel Woolls

Associated Press

Published: Sunday, April 15 2012 4:30 a.m. MDT

FILE - In this file photo dated Sunday, March 11, 2012 in Barcelona, Spain, demonstrators shout slogans against the government's recently approved labor reforms during a demonstration. Spain has become the latest country caught up in the government debt crisis in Europe, sparking fears that it'll join Greece, Portugal and Ireland and go asking for an international bailout.

Emilio Morenatti, file, Associated Press

MADRID — Spain has become the latest country caught up in the government debt crisis crippling Europe, sparking fears that it'll join Greece, Portugal and Ireland and go asking for an international bailout.

Over the past week, investors have grown increasingly wary of buying Spain's debt on the international bond markets, sending the country's cost of borrowing to highs not seen in nearly four months and its stock markets plummeting.

In reality, worries about Spain have always been there. Bond market pressure on Spain began seriously to mount in 2011 as the country's deficit and unemployment rocketed. But late last year, two factors helped ease this pressure. First, Mariano Rajoy's right-wing and pro-austerity Popular Party took over the reins after winning general elections in November. But of much greater impact was the European Central Bank's decision to flood the region's financial system with more than €1 trillion ($1.3 trillion) in bargain loans to banks. The injection spurred lenders to snap up battered government debt, driving Spanish borrowing costs down. However, the effects of the cheap loans across Europe have since dissipated and Spain is taking the brunt of market distrust.

Rajoy's administration is faced with two big tasks: resurrect an economy with 23 percent unemployment through job creation while trying to reduce its deficit to satisfy EU overseers and international investors via austerity measures. To help them achieve these, the government has already imposed draconian spending cuts as well as introducing labor market and banking sector reforms.

Meanwhile, Spain's banks are saddled with huge amounts of toxic real estate loans and some of the country's regional governments have spent way beyond their means.

Rajoy has warned voters that Spain is in for a rough ride, acknowledging that things will get a lot worse before they get better. With one hand, the government is draining money from the economy as it tries to cut its deficit via austerity cuts. With the other, it is attempting to lay the foundation for a more efficient economy by, for instance, rewriting rigid labor laws to encourage companies to hire once Spain and Europe recovers.

The eurozone has recently increased the size of its financial firewall to help out its members should they fail to raise money from the markets. But Spain's €1.1 trillion ($1.45 trillion) economy is twice the size of the previous three bailout victims put together. Analysts are worried the eurozone's €800 billion firewall is not large enough to deal with the potential threats coming from Spain and other indebted countries such as Italy.

Here is a look at Spain's problems and what might be done to solve them.

__ RISING GOVERNMENT DEBT

Until recently Spain's national debt as a percentage of its economy did not look that bad when compared with other European countries. At the end of 2011, Spain's debt stood at 68.5 percent of gross domestic product, below the eurozone average of about 90 percent and in a different league from Greece at 160 percent.

But now that ratio is expected to shoot up. This is due largely to some of the country's 17 semiautonomous regions running up huge debts and thereby making the national figure look less manageable. It was overspending by some of these regions — Catalonia, Valencia and Madrid accounted for more than half of all regional debt last year — that made up more than a third of Spain's bloated deficit of 8.5 percent of GDPThat was well over the 6 percent which had been forecast.

The central government has guaranteed a €35 billion bank loan to help regions and town halls pay gardeners, medical suppliers and other businesses with long-outstanding bills. The economy minister says this loan is one reason why by the end of this year the national debt to GDP ratio will be around 80 percent.

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