4-11 Another fine mess

http://www.economist.com/printedition/2012-07-28

Spain and the markets

The Spanish patient

A full bail-out of the euro area’s fourth-largest economy is looming

Why I picked up the article

We are not so interested in and surprised with EU’s current bail-out situation. “Again? Yes, I know” this is our frank impression. “The next country is Spain…” We always heard about that. But we don’t know so much “Why Spain? “ This article explains why Spain is patient and why they need a full bail-out.

Discussion:

Why is Spain in hard situation and who should be responsible for a bail-out?

Summary:

(1) Spain’s ten-year bond yields touched 7.75% on July 25th.

Previous bail out of Greece, Ireland and Portugal occurred not long after rates has surpassed 7%. (Japan’s ten-year bond yields is around 0.74% on August 3rd.

(2) Spain’s situation does not look bad since their government continues its effort.

Public debt, 69% of GDP is lower than Italy’s 120% less even than Germany’s 81%. The budget deficit is high but prime minister announced more tough austerity measures. European finance ministers approved to put €100 billion partial bail-out for Spanish bank.

(3) Why does Spain need full bail out?

Mario Rajoy failed hard choices at the beginning, notably cleansing of the banks. Spain’s high external debt (the highest in euro area) is the biggest worry. Foreign capital has been fleeting over the past year. That has weakened the banks and its economy.

(4) Choices

The European Stability Mechanism (ESM), their new permanent rescue fund would be a hope but ESM cannot come into force until September (Germany’s court will rule) They have some cash reserve and can still borrow at short maturities and can use the euro area’s temporary rescue fund. It may possibly survive the summer. But Spain needs €385 billion to cover its budget deficit and will consume almost all of their rescue fund. If the European central bank (ECB) starts buying their bond, nerves will calm but it doesn’t want to.

Comments
6 members and 5 articles we had this week. Last week I tripped to Vietnam and Myanmar so I was absent 10th discussion in season 4.