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Article / 23 April 2012 at 12:05 GMT

Spain's pains increase chance of 2012 rescue to more than 50%

Steen Jakobsen Steen Jakobsen
Chief Economist & CIO / Saxo Bank
Denmark

In this macro view video with Steen Jakobsen, Chief Economist, Saxo Bank, he discusses the likely scenario for saving Spain which is awfully close to putting out its hand for what will be the Eurozone’s fourth bailout package. Steen believes there’s more than a 50 percent chance Spain will ask for help already this year. A combination of European Financial Stability Facility and European Central Bank support is the 'saving Spain' route we will see, he says.

The problems abound for Spain, ranging from the country’s regional banks’ balance sheets, the autonomy of the regions and resultant issues in implementing austerity plans, the struggles of the government to pay its debt and stay afloat and the furore on the streets with unemployment at exorbitant levels. Ranking which challenges the Spanish government should tackle first however is not possible at this late stage in the game. With youth unemployment close to 50 percent and more than 1.8 million people living on less than 400 euros a month, Steen describes Spain as a society grinding towards the edge.

He gives the Spanish Government credit for trying to make changes but adds that adhering to what Germany wants Spain to do, which is more austerity, is probably not the best solution with Spain mostly reaping lots of pain and little gain.

Spain’s fiscal multiple is greater than 1 percent which means that for every 1 percent of austerity implemented the negative impact on gross domestic product is more than 1 percent and Steen believes it's actually closer to 1.5 to 2 percent. In other words, if Spain is successful in reining in expenditure by about 5.5 percent over two years it could cost between 5 and 10 percent of growth, says Steen. This renders the exercise in itself futile, he says.

With the fiscal multiplier so large and the social dimensions so unsolvable he believes there is more than a 50 percent chance Spain will be asking for help already this year. Such help will most likely come in the form of asking the European Financial Stability Facility for bank recapitalisation funds because Spain’s banks are a sore point. More property price declines are seen ahead and the resultant forced sale of assets at low prices means the banks will have to take significant losses.

Furthermore Spain still has the ability to ask the European Central Bank for help in buying its bonds. A third round of the ECB's Long Term Refinancing Operation is not a likely scenario, he says.

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