Thursday, June 7, 2012

Spain’s Dilemma

Spain's Economic Crisis

The global financial markets are currently observing Spain’s economic activity with fear and anxiety. Whenever the country’s government takes any decision, it catches the global business headlines. Every move, political or financial, has economic repercussions, which are then discussed and debated by experts. It seems as if there are no good or bad decisions anymore, all of the country’s actions are criticized in some quarters and praised in others. There are thousands of analysts with thousands of opinions, all of them thinking that theirs is the right one and it must be heard.

Amid all of this clutter and confusion, there are those whose voices must be heard, and if not, then later they will have the right to say “see, I told you so!”

The banking crisis in Spain is bad and getting worse, but it not as bad as Greece. The country’s finances are in a much better shape. The immediate problem is Spain’s fourth largest bank, Bankia, which is asking the government for $23.5 billion. The government has already injected a similar amount in the banking sector.

The country is going through a worsening recession, and banks are asking for more money. So in times of recession, where is the money going to come from? The government is going to borrow money by issuing more bonds. Its interest rate on the 10-year bond is already at a record high of 7%. Lenders are not prepared to give their money to Spain, unless it promises exceptionally high return. By issuing more bonds, the country will be able to save Bankia, but it will certainly make Spain’s finances even worse.

So to save its crippling banking sector, Spain needs to borrow money but if it borrows money then its finances will be worse than before. No matter what government decides, there are difficult times ahead. As Paul Krugman once commented on the Greek financial crisis, “there are no easy solutions for Greece”, unfortunately, this is also true for Spain. 

Your comments and feedback are always appreciated
Sarfaraz Khan