Spain cannot finance itself for much longer, says Spanish PM

Mariano Rajoy, Spain's prime minister, has admitted that, at the current borrowing rates, the country's finances cannot hold out for long.

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013
Spain is in dire straits. Its economy is heavily in recession, and latest economic indicators from its central bank show that Spain’s GDP is set to contract even faster in the second quarter.

The recession, coupled with the sovereign debt crisis, that is severely limiting Spain’s ability to borrow money on the international markets. Spanish government bonds are trading at yields above 6.8%, perilously close to the unaffordable 7% mark. ‘There are institutions and also financial entities that cannot access the markets,’ admitted Rajoy at yesterday’s EU Summit. ‘It is happening in Spain, it is happening in Italy and it is happening in other countries.’

Spain was granted a reprieve earlier this week in the form of a €100bn bailout for its banking sector. Only today, it has been confirmed that Bankia will receive €4.5bn to keep it afloat, provided its deep restructuring plans please the powers that be, of course. But this is not a sticking plaster for the financial wounds of the whole nation, just the beleaguered banks. And if it cannot borrow money at reasonable rates, Spain will be forced to approach the eurogroup, cap in hand, for a full bail-out.

Madrid has one of highest funding gaps in the eurozone and this is making the debt markets very nervous. To try and restore confidence, Rajoy will be trying to sweet talk the other leaders in the bloc, showcasing Spain’s austerity measures and calling for increased unity across the eurozone.

But confidence is in short supply at the moment. Spain is one of the eurozone’s 'big four', and a default by Madrid would be a far worse financial disaster than that posed by Greece. How bad could it be? Not ever the Bank of England chief Mervyn King knows that. But if Rajoy failes to charm Merkel et al, we may soon find out…

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