Spain belongs to the so-called PIIGS (Portugal , Ireland, Italy, Greece and Spain ), a group of sick eurozone economies. All of them have been the eurozone’s most vulnerable economies as the debt crisis in the region keeps escalating. All these countries have recently changed their governments in order to try to restore investors’ trust in their T-bonds.
Spain held early parliamentary elections on November 20th 2011. According to the final results, Spanish People's Party (which used to be the opposition) won the elections after receiving 45% of the votes. The Socialists will have to yield power to the new ruling party.
Spanish problems or… why Spain lost investors’ trust
What are Spain ’s current problems? According to the West European Association of Traders and Investors under , there several economic and political problems in the country:
The main enemies of the Spanish economy are high unemployment, budget deficit, considerable public debt and economic stagnation.
The Spanish rate of unemployment is the highest in the EU (21.5% or 5 million people while the EU’s average rate is 10%).
As for Spain ’s budget deficit, it is over 70 billion euro. Spain promised to curb the deficit so as not to exceed the 4.4% limit. Pay attention to the fact that the eurozone limit is 3%. Some analysts anticipate 7% later this year. Some IMF experts say Spain will need 5-10 years to eliminate the deficit.
Spain ’s public debt is equal to 65% of the GDP. If to compare it to the Greek debt (100%), it is a little bit smaller but, anyway, Spain needs tough austerity measures to service its debt. Spain needs to borrow 450 billion euro until 2014 just to pay off its bonds.
In the meantime, the Spanish economy is falling deeper into recession despite being the eurozone’s 5th biggest economy and the world’s number 12!
All the mentioned problems keep pressing the country’s economy. Moreover, Spain cannot boast highly developed manufacturing and hi-tech industries. Even tourism (the world’s 3rd most profitable one)cannot cover the costs of reducing the budget deficit and servicing the public debt.
What does the future have in store for the new Spanish government?
The Socialists(the previous government) have already managed to take some major steps. In 2009 Zapatero’s government approved some austerity measures, including salary cuts in the country’s public sector, pension freeze, pension age hike, thus reducing the spending by 15 billion euro. The socialist didn’t go further as they were afraid of losing their electorate. However, due to them Spain completely lost its investment attractiveness:
What do common people expect from the Conservatives? Nobody expects them to start making miracles. However, the Spanish expect the new government to take more efficient and decisive steps aimed at stabilizing the economic situation in Spain . We must confess that when the conservatives won the elections, that slightly reassured investors.
So what are the challenges the new government will have to face?
In order to come close to the desired 4% of the budget deficit, they will have to reduce the budget spending by 30B euro. Pension cuts seem unavoidable as well (now they spend 120B euro on pensions). Moreover, some experts anticipate a banking crisis in Spain as Spanish banks feel the burden of 180B euro in “bad” housing assets.
Last week Spain ’s 10-year bond yield came close to the critical level of 7%. There have been no cardinal changes since then. This is a wakeup call for the Spanish authorities.
The next EU summit is scheduled for Dec 9th 2011. So in less than 2 weeks Rajoy will have to account for Spain ’s austerity package to his EU colleagues.
Tips for investors: What are the Conservatives planning to do?
During the run-up to the elections Matiano Rajoy made some shady promises, not to mention specific solutions. Now they promise to take the following steps:
· To reform the labor market. The salary will be determined locally and will depend directly on a worker’s efficiency.
· To cut the dismissal pay.
· To reduce the administrative apparatus and social spending. Healthcare, which used to be free, now seems to become partially paid.
· To toughen the country’s economic policy. This factor reassures investors as the Conservatives now have an opportunity to quickly adopt any bill because they represent the parliamentary majority.
Market Leader and would appreciate if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following question:
In your opinion, can a change of power cure a sick economy?
