Spanish Unemployment Rate Tops 20%, Borrowing Costs Rise; Debt Rollover Risk Mounts

The economic picture in Spain is grim. Spanish Unemployment rose from 18.8% to 20.1%, union work rules helped wreck the economy, and Spain must shrink its deficit according to EU rules.

Please consider Spanish Unemployment Rate Tops 20%, Undermining Deficit Fight

Spain�s unemployment rate rose above 20 percent for the first time in more than a decade, undermining Prime Minister Jose Luis Rodriguez Zapatero�s fight to cut the euro region�s third-largest budget deficit.

Spanish borrowing costs have surged in the past two weeks on concern the state will struggle to rein in the deficit. Standard & Poor�s cut the country�s credit rating on April 28, saying the government was underestimating its fiscal problems and overestimating growth prospects. Adding to public spending, Zapatero has extended benefits for the long-term unemployed.

�I suspect employment will continue falling for most of the rest of this year,� said Ben May, an economist at Capital Economics Ltd. in London. �Clearly it has knock-on implications for fiscal policy.�

Spain�s budget deficit was the third-largest in the euro region last year, at 11.2 percent of gross domestic product. S&P said it expects the shortfall to remain above 5 percent in 2013, the year the government has pledged to cut it to the EU�s 3 percent limit.

Spain has some of the highest firing costs for open-ended contracts in Europe, according to the World Bank�s Doing Business Index, while around a quarter of the country�s workers have temporary contracts. The Bank of Spain says a labor-market overhaul is �urgent� as high unemployment poses a risk to banks and the Socialist government has pledged to change labor legislation after talks with unions and employers.

The surge in unemployment is eroding support for Zapatero, who was re-elected in 2008 on pledges of full employment.

Debt Rollover Risk in Spain

Spain's economic crisis is far more important to the EU than Greece. In addition to massive unemployment and a stagnant economy, one of Spain's biggest problems at the moment is ability to rollover 225 billion of euro denominated debt.

Please consider a few snips from Spain�s Debt Rating Cut as Finance Officials Meet

�The issue is rollover risk,� said Jonathan Tepper of Variant Perception, a research group based in London and known for its bearish views on Spain. �Spain has to issue new debt to the tune of 225 billion euros this year. Forty-five percent of their debt is held by foreigners. So they are dependent on the kindness of strangers.�

Though they are under the most immediate pressure, Greece and Portugal are relatively small economies.

Given Spain�s size, its debt crisis is seen by many as the looming problem for world markets. On the surface, its debt load appears manageable. Its debt relative to gross domestic product, the broadest measure of its economy, is 54 percent � compared with 120 percent for Greece and 80 percent for Portugal.

But what Spain does have is the highest twin deficit, or combined budget and current account deficits, of any country in the world except Iceland, a reflection of how dependent it is on increasingly fickle foreign investors for financing. Spain has 225 billion euros in debt coming due this year � an amount that is about the size of Greece�s economy.

The base of investors willing to invest in the bonds of Spain and other distressed European countries is dwindling. Mohamed El-Erian, the chief executive of Pimco, one of the world�s largest bond investors, has said publicly that Pimco is no longer a buyer of Greek debt. Other Pimco executives have also said they have a negative view of the debt in countries on Europe�s periphery.

Given the losses that European investors have taken on Greek, Spanish and Portuguese bonds in recent months, it seems doubtful that such investors can be relied on to provide the capital these countries need.

If it takes $120-$300 billion to bail out Greece over three years, what would it take to bailout Spain?

That's a trick question actually. The right question is "Can these economies be bailed out at all?"

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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