Europe's Leaders Face a New Crisis in Spain

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Just as the euro had begun recovering from the Irish crisis, another financial crisis has emerged in Spain.As European leaders begin a two-day summit Thursday, a new crisis is brewing in Spain that could threaten the stability of the euro.

U.S. ratings agency Moody's Investor Service on Wednesday placed Spain's government bonds on review for possible downgrade. In late September, the agency already had downgraded Spain's bonds from the top rating of Aaa to Aa1, a notch lower.

Moody's analyst Kathrin Muehlbronnr said that while she didn't think the country was having a solvency crisis, the fact that it has to raise $226 billion next year, plus an additional $40 billion for regional governments, "make the country susceptible to further episodes of funding stress."

The news sent the euro plummeting against the U.S. dollar to $1.321, down from $1.42 as recently as November, just as the currency had begun to recover from the crisis over Ireland's banks. That debacle forced the Dublin government to take a $113 billion bailout from the European Union and the International Monetary Fund (IMF). The Irish parliament approved the deal Wednesday.

Talking Points


Ministers meeting in Brussels on Thursday will be discussing whether to increase the European Commission's $1 trillion bailout fund to help Portugal and Spain through their financial crises, an idea that Spanish Economy Minister Elena Salgado supports.
Arturo Bris, a finance professor at the International Institute for Management Development in Lausanne, Switzerland, says Spain's immediate problem isn't that it can't repay its government debt -- which was the problem that Greece faced in April -- but is instead a problem of refinancing.

Bris noted that Spain's debt-to-GDP ratio is only 65%, way below that of the U.S., which has a debt-to-GDP ratio of 120%. But Spain borrows 50% of its funding abroad, and it must raise that money at bond auctions where international markets control the interest rates.

For example, Bris says, at an auction Tuesday, Spain had to pay 4% interest on one-year government bonds, an extraordinarily high level for sovereign debt from a European country. In contrast, one-year U.S. Treasury rates are around 0.29%.

"There is not a danger Spain will not be able to honor its obligations," Bris says. "The danger is that now, when Spain goes to the Treasury auction, financial markets won't be willing to provide financing because they don't believe in the process of the economy."

New Deal for Spain?

Bris believes Spain will be forced, much as Ireland was, to take either a bailout or announce a drastic reorganization of the economy. Northern-tier European countries, such as Germany, like to keep pressure on the peripheral countries because that tends to drive down the euro's value, helping European exporters sell abroad, he says.

For example, when the euro started rising last month after the resolution of the Irish crisis, German Chancellor Angela Merkel announced that in the future, bondholders would have to share in the losses of any European government bonds that need to be refinanced. That news sent markets tumbling again, Bris points out.

In Athens, an outbreak of civil unrest showed the dangers that Europe faces if the debt crisis isn't resolved soon. Protests broke out against the new cuts in government services mandated by a reform package with the EU and the IMF. Protesters fought running battles with police, and the nation endured its seventh general strike of the year, grounding flights and halting most public transportation.

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91 Comments

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fred

Spain did give us Ricki Martin (or was that Led Zepplin?).......

December 16 2010 at 11:03 PM Report abuse rate up rate down Reply
evilspaniard053

BUY BUY BUY!! SPEND SPEND SPEND!!!!

THE NOW GENERATION AT ITS FINEST!

When Spain ruled an Empire and not broken up into little sub countries like they are now they didn't worry about money... Now they are a weak commie socialist State. The Republican Commies have returned and have destroyed the country..
Franco should have just thrown in the towel and let them win back then....

December 16 2010 at 5:22 PM Report abuse +2 rate up rate down Reply
David

Slain, didnt they try to make a green economy? Green jobs!!! LOLOLOL as if such a thing exist!

December 16 2010 at 4:03 PM Report abuse +4 rate up rate down Reply
larryeart

The USA financial balance sheets are far WORSE than that of Spain. USA will be credit downgraded too. It is NOT a AAA creditor with ANY intention of EVER paying off all it's debts! UAS and it soft,coddled citizens have NO DISCIPLINE and no maturity-just SPEND,SPEND,SPEND,SPEND. And CHARGE IT!, CHARGE IT!, CHARGE IT!

December 16 2010 at 4:02 PM Report abuse +3 rate up rate down Reply
Bryan Citrowkse

the problem is when we go to war we dont Murder enough people. So now we have too many people ruining it for the rest of us. :-)

December 16 2010 at 3:50 PM Report abuse +1 rate up rate down Reply
CADNR

The IMF and yes America is a member are working on a plan were the Euro will merge with the dollar.

December 16 2010 at 3:11 PM Report abuse -2 rate up rate down Reply
1 reply to CADNR's comment
evilspaniard053

F the IMF! They are in on all the money schemes!!! and bailouts etc!

December 16 2010 at 5:38 PM Report abuse +1 rate up rate down Reply
Walt

I BASICALLY BELIEVED IN GLOBAL WARMING, UNTILL I HAD A TALK WITH MY DAUGHTER AT MIT, THEY NOT ONLY BELIEVE IT AT THE #1 SCIENCE SCHOOL IN THE WORLD. THEY ARE WORKING ON SCALES OF THE DEVASTATION, AND LONG TERM EFFECT, FROM INSECTS TO POLLINATION, DROUTS AND FAR MORE SCARY THINGS.

IT IS NOT A LIBERAL THING, WHEN 150 COUNTRIES,2200 TOP SCIENTIST SAY YES IT IS REAL, AND IT HAS ALREADY STARTED, WE ARE TALKING ABOUT 2200 OF THE WORLD'S TOP CLIMITOLOGIST AND SCIENTIST. NOW PO PO THIS ALL YOU WANT, AND THE WORLD WAS PROVEN TO YOUR ANSESTORS IT IS ROUND, YES SCIENCE IS A SCARY THING WHEN THE HUMAN RACE IGNORE'S SCIENCE, AND USES RELIGON, OR POLITICS TO MAKE DECISIONS, THEY USUALLY CALL IT THE DARK AGES, AND THIS ONE WILL REALLY BE BAD FOR CENTURIES. IT IS NOT SUPERSTITION OR A POLITICAL DEAL, IT IS SCIENCE. OR IF YOU WANT TO LISTEN TO THE COAL COMPANIES OR PETROLIUM COMPANIES PAY BY THE HOUR SCIENTIST, GO AHEAD.

December 16 2010 at 1:28 PM Report abuse -7 rate up rate down Reply
5 replies to Walt's comment
Betsy

I am one (1) USA born taxpayer trying to figure out what the Hell is everyone worried about Spain, Europe and Asia problems when USA has enough of our own. Please do not blame any of todays problems on our president. Ever since Washington we have been having money money money problems. Money is not God an da you ain't gonna take it with ya and who cares what family or whatever and whoever is gonna do with it cause they ain't takin it to the grave either. Hey I got an idea maybe Geranimo and Sitting Bull should a been our first president and vice president they and all the natives of usa never had money and they had no problems until Pilgrams arrived. Not Spain's Columbus with all his queens money.

December 16 2010 at 1:18 PM Report abuse -4 rate up rate down Reply
3 replies to Betsy's comment
lymeonerock

500 years of Slavery and Colonialism & Apartheid has its consequences
Your Sin is returning to you now : )

December 16 2010 at 1:15 PM Report abuse +1 rate up rate down Reply
3 replies to lymeonerock's comment
cubamex2003

Spain has been infected by the socialist virus..government subsidizing every non-profitable vanture..chickens coming home to roost...

December 16 2010 at 12:45 PM Report abuse +7 rate up rate down Reply