Analysis: Spain faces uphill battle to avoid sovereign bailout

Thu Jun 14, 2012 8:53am EDT
 
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By Julien Toyer

MADRID (Reuters) - Spain will have to play the right cards at the right time to shore up confidence and avoid sliding towards a full-scale sovereign bailout despite negotiating European financial assistance of up to 100 billion euros for its banks.

The country's struggle to meet its deficit goal for 2012, the risk that the banking sector clean-up moves too slowly and the need to tap the debt market for another 100 billion euros ($125 billion) this year puts Spain just a few steps away from needing more external help, sources and analysts say.

Centre-right Prime Minister Mariano Rajoy has some room for maneuver even as he calls on the euro zone for immediate and medium-term measures to help restore credibility.

Despite its treasury minister declaring the bond market was closing to it, Spain has a strong liquidity position which will enable it to meet its debt obligations for at least another few months, and it has room to boost revenues by raising value-added tax or energy taxes.

But investors would have to believe in the program in order for Spain to regain affordable access to debt markets after borrowing costs spiraled to euro era highs on fears the country's debt pile would soon reach unsustainable levels.

Investors have also been spooked by the prospect of the banking bailout relegating private creditors to the bottom of the repayment pecking order should Spain ever default, since the euro zone's ESM rescue fund would be paid out first.

"The large share of effectively senior debt, a likely deterioration of macroeconomic conditions and fiscal overshoots do raise the specter that the sovereign itself may yet need to request a bailout of its own at a later stage," Citigroup wrote in an analyst note.

Megan Greene, senior economist at Roubini Global Economics, which has been consistently bearish on southern Europe, sees a sovereign bailout as inevitable.   Continued...

 
Alberto Tojeira Simoes, from Portugal, begs for money in Madrid's commercial district June 11, 2012. Financial market euphoria over a European bailout for Spain's debt-stricken banks faded quickly on Monday as investors sounded the alarm over its impact on public debt and bondholders, and eyed the next risks in the euro zone's debt crisis. EU and German officials said Spain faces supervision by international lenders after the deal to lend Madrid up to 100 billion euros ($125 billion), contradicting Prime Minister Mariano Rajoy who insisted the cash came without such strings. REUTERS/Susana Vera