Spain's Economic Woes

Spain’s Economic Woes Rattle Investors; Europe Markets Slide

A slide in Spanish stocks and bonds deepened as investors’ concerns that Prime Minister Mariano Rajoy may require international aid rattled markets.

Bloomberg,

6 April, 2012

Spain, the euro region’s fourth-largest economy, is in “extreme difficulty,” Rajoy said yesterday, raising the likelihood of a bailout for the second time this week. The Ibex stock index slid 0.7 percent in Madrid today. The benchmark Stoxx Europe 600 Index extended its biggest retreat in four weeks and the MSCI Emerging Markets Index slipped 0.3 percent to 1,034.65 as of 3:14 p.m. in Madrid.

A rally triggered by more than $1 trillion of European Central Bank loans to the region’s financial institutions to stave off a credit crunch is running out of steam and, while Italian Prime Minister Mario Monti is pressing ahead with an economic overhaul, Rajoy is failing to meet deficit targets amid a worsening recession.

“Stress has returned to the periphery of the euro area,” David Mackie, chief European economist at JPMorgan Chase Inc., wrote in a note today.

Spanish bonds fell today, pushing the yield on the 10-year benchmark bond to the highest since Dec. 12 at 5.79 percent, and widening the spread with similar-maturity German bunds to more than 4 percentage points.

Asian Currencies

Asian currencies declined, led by Indonesia’s rupiah, as the region’s stocks extended their biggest loss since December after weak demand for Spanish bonds renewed concern Europe’s debt crisis will worsen. The MSCI Asia-Pacific Index of shares dropped 0.1 percent, following a 1.5 percent slump yesterday.

The yield on Spain’s 10-year benchmark bond has jumped nearly one percentage point since March 2, when Rajoy announced the government would miss its budget-deficit target this year. He set the target for 2012 at 5.3 percent of gross domestic product -- lowering it from 5.8 percent under European Union pressure -- instead of 4.4 percent and warned public debt will surge to a record 79.8 percent of GDP as it imposes the deepest austerity in at least three decades.

The concern about Spain also led to a slump in Italian bonds, even as Monti moved to eliminate the budget deficit next year and revamp the economy. The yield on Italy’s benchmark 10- year bond rose 13 basis points to 5.50 percent, the highest since Feb. 23.

‘Closer Scrutiny’

Italy’s borrowing costs have fallen lower than Spain’s since March as concerns about the latter’s solvency became greater. One of Monti’s moves to increase confidence in country’s economy has been to present an overhaul of labor- market rules, cited by economists as one of the reasons why Italy’s economic growth has lagged behind the European Union average for more than a decade.

“Spain will remain under closer scrutiny,” Janet Henry, chief European economist at HSBC Holdings Plc, wrote in a report today. “The concerns about the financial system are unlikely to abate, in which case the markets will continue to question whether or not Spain too could also find itself in need of financial assistance.”

The ECB yesterday waived an exit from emergency stimulus measures after Spain barely covered the minimum amount targeted at an auction. ECB President Mario Draghi wants governments to deliver on promised structural reforms and fiscal consolidation before the impact of measures wears off.

Credit-default swaps insuring Spanish bonds have surged 21 percent since the start of the year to 461 basis points, according to CMA, signaling investors bet its government may be the fourth in the euro region to request a rescue. That compares with a 1 percent decline in swaps on Portugal, the next worst- performing nation, and more than 40 percent drops for Norway, Sweden and the U.S.