Spanish bailout would be fatal for Eurozone

ATTENTION has turned to the Eurozone’s fourth largest economy as Spain’s leaders scramble to assure the markets that it will not follow Ireland’s lead.

Most agree that a Spanish bailout would be potentially fatal for the euro and would exhaust the €440bn of Eurozone funds set aside for emergency aid to its teetering economies.

Economists at Fathom Consulting highlighted wrote yesterday: “Spain’s GDP is almost twice the size of Portugal, Greece and Ireland combined and therefore any hint of trouble would send shockwaves through the euro area.”

The government has implemented a severe austerity plan and has managed to slash its deficit this year to comply with its target of 9.3 per cent for 2011 (versus over 11 per cent last year). But its leaders are painfully aware that even Ireland’s much-praised €15bn of cuts this year did not keep it safe from the market panic.

Spain held a successful auction of short-dated government debt yesterday, selling off €3.26bn’s worth of three and six-month gilts, but the cost of its borrowing had nearly doubled since its last such auction a month ago. Most regard the punitive yields being demanded – 10-year gilt yields jumped above five per cent today – as unsustainable.

However, the government has built up a less daunting mountain of debt than has Ireland: its debt is estimated at 60 per cent of GDP versus 100 per cent.