When Europe had persuaded itself that the worst was over and slight growth was around the corner, the Spanish wheel began creaking. Spain barely managed to cover its debt auction and the gap between Spanish and German debts has widened sharply in the past month --a bad sign.
The one good bit of news is that it is not as heavy as Italy's so there is less debt to service at high interest rates. The problem is that Spanish debt is slated to rise, because with 23% plus unemployment, tax receipts will be down, meaning that the debt is expected to enlarge despite massive government budget cuts.
Spain is also paying the market price for its success in softening EU budgetary demands. The investor logic is to ask who is going to guarantee that Spain will not resort to the same strategy next year? What use is the European Union budget pact if member states can violate it the very day they sign it?
Then there is a matter of the banks. Spain's banks are still wobbling because of the bad debts from the housing bubble. In less troubled countries, the government would step in to guarantee the liquidity of the banks, but if Spain did this it would nullify the effect of the austerity measures.
Therefore, the banks are being asked to raise the money on their own but are encountering frigid enthusiasm on the financial markets. Therefore one of the options is for a targeted bailout directed at solving the problem of the banks.
Spain and the European Union reject suggestions that Spain requires a bailout and a major reason is that bailing out the huge Spanish economy would literally break the bank.
The picture however is bleak.
“Spain is facing an economic situation of extreme difficulty, I repeat, extreme difficulty, and anyone who doesn’t understand that is fooling themselves,” Spanish Prime Minister Mariano Rajoy told a meeting of his People’s Party Wednesday in the southern coastal city of Malaga, according to Bloomberg.
The nervousness about Spain has taken a toll on the value of the euro that finds itself at a three-month low versus the dollar.