Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Spain's Economic Crisis Shows the Eurozone Can't Escape its Debt Trap

Interest-Rates / Global Debt Crisis Nov 01, 2011 - 05:32 AM GMT

By: Money_Morning

Interest-Rates

Best Financial Markets Analysis ArticleDavid Zeiler writes: Fresh evidence of Spain's deepening economic crisis has revived fears about that nation's ability to dig out of its sovereign debt problems, and illustrates why the Eurozone debt crisis is likely to drag on for years.

Spain's gross domestic product (GDP) was flat in the third quarter, the country's central bank said yesterday (Monday). That follows anemic growth of 0.4% in the first quarter and 0.2% in the second quarter.


Even more troubling is the nation's unemployment rate, which rose to 22.6% in September - the highest in the Eurozone.

As one of the PIIGS (Portugal, Ireland, Italy, Greece and Spain), Spain has been trying to wrestle down its high sovereign debt with austerity measures. Unfortunately, those measures are driving the Spanish economy toward recession, which is making it impossible for the government to hit its budget deficit reduction targets.

"It will be very difficult to meet the deficit goals without additional austerity, which might push the economy back into recession," Ben May, a European economist atCapital EconomicsinLondon, told Bloomberg News. May thinks Spanish unemployment could go as high as 25%.

Each of the PIIGS faces the same cycle of futility - economy-killing austerity measures that erode the nations' ability to cope with their debt issues, necessitating even deeper austerity measures.

But without the economic growth to create the wealth to cope with the budget deficits, the Eurozone debt crisis will gobble the PIIGS up one by one.

Like Greece
In Greece's case, its faltering economy led to a series of bailouts from the European Commission (EC), the International Monetary Fund (IMF) and the European Central Bank (ECB), to avoid default.

But the Greek economy is among the Eurozone's smallest. If the other PIIGS, particularly Italy and Spain, descend to where Greece has fallen, there won't be enough money to rescue them.

"Unless European economies outgrow their deficits, the chance of rolling bailouts working is slim to none," said Money Morning Capital Wave Strategist Shah Gilani.

Just last week European Union (EU) leaders developed a rescue plan to contain the Greek debt crisis and prevent similar problems in Spain and the other PIIGS. They agreed to increase the EU bailout fund to $1.4 trillion (1 trillion euros), step up efforts to recapitalize banks and write down Greek debt by 50%.

But not only will the plan fail to help the economies of any of the PIIGS, it's little more than a Band-Aid fix.

"The chance of the plan to save Europe actually working is exactly zero," said Gilani, pointing out that the bailout money simply isn't there and will need to be borrowed. Even then it will only be enough to "save Greece from defaulting for about three minutes, and enough to recapitalize all Europe's teetering banks for about four minutes, and enough to prop up Italy's bond market, for about six minutes. Oh, and when the seventh minute starts, they'll need more money all over again."

Spain's Conundrum
Spain had set a target of 1.3% GDP growth for 2011, which after yesterday's news is expected to fall to about 0.8%. That will push the debt to 67% of GDP, which is less than half of that of Greece but still double 2007 levels.

Hitting that growth target was supposed to reduce Spain's budget deficit from 9.2% of GDP last year to 6% of GDP in 2011. The target for 2012 is 4.4%, which looks increasingly unlikely.

"They will never make it," Ludovic Subran, chief economist at credit insurer Euler Hermes SA in Paris, told Bloomberg Businessweek. "Our September forecast sees Spain's deficit at 7%."

Moody's Investor's Service (NYSE: MCO), which two weeks ago cut Spain's credit rating for the third time in two years, said it expects Spain's deficit for 2011 to be 6.5% and fall only to 5.2% for 2012.

Not making its deficit-reduction targets will make it harder for Spain to borrow more money.

"Missing the deficit target would destroy private-sector demand for your bonds," Harvinder Sian, an interest-rate strategist at Royal Bank of Scotland in London, told Bloomberg Businessweek. "If you start seeing big figures like 7%, then it's very problematic."

Spain's economy also is suffering from a hangover from a burst housing bubble even more severe than the crisis in the United States. Real estate losses are still rising in Spain, adding to the risk it will fall further and further behind in meeting its deficit targets, which will push the country ever closer to a full-blown Greek-style crisis.

All of the uncertainty is eroding investor confidence in Spain's ability to solve its debt woes - which could end up lighting the fuse to the financial meltdown everyone fears.

At a recent seminar in Helsinki, noted economist Nouriel Roubini warned of just such an outcome, saying that both Spain and Italy would need a "bazooka" to "have a fighting chance to avoid insolvency."

"Once you have lost the market confidence, and the market doesn't know how much fiscal effort you're going to do, how much reform you're going to do, who's going to be your government, they put pressure on your spreads," Roubini said. "You look insolvent."

Source : http://moneymorning.com/2011/11/01/spains-economic-crisis-shows-the-eurozone-cant-escape-its-debt-trap/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in