Monday, 23 July 2012

Q&A: Spain's debt crisis and what it means for the eurozone and Britain

Stock markets are tumbling as Spain's borrowing rose to new record highs. Here is a look at why this is happening and what the implications might be.

Debt crisis: Shares drop, euro hits low on Spain woes
Investors are concerned that Spain, one of the eurozone's biggest economies, might need a full-blown bailout. Photo: AP
Q: What has happened to Spain's borrowing costs?
A: Spain's borrowing costs rose to the highest level since the euro was created on Monday. The yield on benchmark 10-year yields rose to 7.5pc, where the higher the yield the lower the demand for Spanish debt.
Anything above 7pc is considered unsustainable. The Spanish government will not be able to afford to borrow indefinitely at such high levels, which means it will need a bailout if costs do not come down.
Q: Why now?
A: The crisis in Spain has escalated. It has been clear for weeks that Spain's banks needed emergency bailout funding, but now fears are mounting that the country will also require a full-blown sovereign bailout. European leaders on Friday agreed to grant up to €100bn (£78bn) of funds to Spain's banks.
Markets have been spooked by news that two of Spain's regions - first Valencia and now Murcia - have been forced to seek emergency funding from the Spanish government, and others might follow.
There have also been further warnings on prospects for growth, as officials in Madrid warned the economy was likely to shrink throughout 2013. Spain is battling with a tough austerity programme as the government tries to bring down its debt mountain. The unemployment rate is 24pc, and roughly half of young people are out of work.
Q: What does it mean for the rest of the eurozone?
A: Eurozone leaders were already struggling to convince the rest of the world that the single currency has a sustainable future. They now face an even tougher job. Financially and politically, a bail-out for Spain would prove a huge challenge. And as we have seen with Greece, it is unlikely that it would be enough to permanently put to rest fears over Spain, and indeed other financially vulnerable countries including Italy and Portugal. Noise about a potential break up of the euro is once again building.
Q: What does it mean for Britain?
A: Europe is Britain's largest trading partner so continued problems in the region will weigh on demand for UK goods. The eurozone crisis is also damaging confidence among British businesses and consumers, who are unwilling to spend and invest at a time of heightened uncertainty. If one or more countries did ultimately exit the euro, the knock-on effect for the global economy would be huge, and Britain's recession prolonged.
Q: Is Spain the biggest problem in the eurozone?
A: Spain is an immediate concern, but so too is Greece. Greece's international creditors - the so-called "troika" comprising the European Commission, the International Monetary Fund, and the European Central Bank - will arrive in Athens on Tuesday to assess whether the government is making sufficient progress to earn another cash injection.
The visit is crucial: without further bailout funding Greece will be unable to meet its debt obligations or keep up with salary and pension payments. "If the current government fails, the next one will be a government of the drachma," said Costis Hatzidakis, the Greek development minister. Beyond Spain and Greece, there are also mounting concerns over Italy, as the government's borrowing costs rise.

No comments: