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The latest decrease the rating by agency Standard & Poor’s (S & P) Spain sank deeper into the downward spiral. The yield on Spanish Treasury bonds exceeded the agency’s decision after the limit of 6%. Interest on such amount in the long run fourth largest economy in Europe could not afford. Financial Times gives a brief overview of the situation in the country.
How deep is the crisis in Spain?
The Spanish economy is suffering from hardship due to the austerity program with the government in Madrid wants to put the debt under control. In the last quarter of 2011 economic output shrank by 0.3%. Economy Minister Luis de Gindos believes that gross domestic product (GDP) in the first quarter of this year fell by a similar amount. In two consecutive negative quarters, economists point to the existence of a recession.
How Spain will meet its deficit targets?
After negotiations with the European Commission have weakened Spain’s plan to reduce costs for the current year. Conservative government must reduce its deficit to 5.3 percent of GDP instead of the originally contracted 4.4 percent of GDP. EU partners have shown understanding for the Prime Minister Mariano Insurance Corporation because it prior socialist government leaves much higher debt than expected: the budget deficit in 2011 was the amount of 8.5% of GDP, while the socialists originally argued that is six percent.
But to achieve even the revised targets the country needs to make cuts and increase taxes. In the midst of crisis, the government plans to save 42 billion euros, of which 15 billion euros in municipalities and regions. Economists fear that the Iberians, like the Greeks, would fall into the downward spiral of recession and savings.
To avoid this, the Conservatives plan to spare the domestic market. For example, there will be no further cuts in pensions and public wages. Madrid wants to avoid an increase in VAT. However, the Spaniards would suffer higher due to increase in February of income tax. And smokers will have to interfere deeper into their pockets.
In addition, the central government plans to cut the budget authority of the regions. It threatens the problem areas that May will go under the financial control. Madrid considers them responsible for failure to meet deficit targets. Of the 17 semi-autonomous regions account for nearly half of government spending. Primarily managed by the Andalusian socialists oppose austerity measures.
From the ruling conservative People’s Party has come and the first demands that regions must renounce in favor of centralized government. But Prime Insurance Corporation does not hold such radical treatment.
How do Spanish banks?
Record unemployment and the recession left on the balance sheets of Spanish banks deep scars. The proportion of bad loans in total loans during the first quarter, up 8.2 percent – the highest level since 1994. This is demonstrated by recent statistics from the Bank of Spain.
Above all, the real estate industry lags behind in paying its debts. This is where the majority of the share of overdue loans – about 20%, which corresponds to 60 billion. If we take into account risk and credit risks for banks in the real estate sector in previous evaluations of the Central Bank amounted to about 176 billion.
For years, banks assisted in the construction boom fueled by cheap credit, until the bubble burst. From mid-2008 housing prices using data from the Spanish Statistical Office has fallen by about a fifth. The global financial and economic crisis accelerated the crash. Designers have already failed to get rid of his property. Moreover, because of rising unemployment and falling incomes many holders of mortgages fell into arrears with their payments.
At the request of the banks must apply by the end of the year 50 billion as a buffer of security. Of this amount, approximately 16 billion will be to increase the equity and 30 billion – in provisions for credit risks. The Spanish central bank does not exclude that some banks will need to request assistance from the bank rescue fund in the country.
How should the problem be solved in the labor market?
From the high unemployment affects mostly young people: one in two is unemployed. Strict employment protection makes hiring new employees difficult. The reform of the labor market the government plans to relax rules. For example, some extremely high payments for benefits that are payable on termination of an employee will be reduced. Even dismissals for economic reasons should be facilitated.
Thus the government in Madrid follows the requirements of the European Commission and European Central Bank. But some economists question whether the reform will reduce unemployment in the short term. She even could jump further. The government also does not believe that the reform itself will create jobs. Only when the economy starts growing again, the changes can have a positive effect.
Critics argue that even this will not lead to change in fundamental opposition to the labor market. Temporary contracts remain more attractive than permanent positions.
How do rating agencies assess the situation?
S & P lowered the credit rating of Spain on Thursday night rating to “BBB +”. This corresponds to a satisfactory credit rating, but it is only three feet from the so-called Junk. With Junk assigned speculative investments. S & P downgraded the ground that the poor economic situation could lead to further increases in debt.
The second largest agency Moody’s assesses Spain a notch higher than S & P rating of “A3″. In Fitch’s rating is one level higher – up to “A”.