Spain is in a Greek-style debt trap

published 26 March 2012

First Greece, then Portugal, now Spain? While Spain has made some progress, with the new government making it easier to fire workers and thus improving the country's competitiveness, it still looks likely to need a bail-out. The government has just agreed with the EU to cut the budget deficit to 5.3% of GDP this year, from around 8.5% in 2011.

By the end of 2013, the annual shortfall is supposed to fall to 3% of GDP. Reaching these targets could be, "at best, challenging", says Bank of America Merrill Lynch. In fact, it looks well nigh impossible.

The economy is back in recession, unemployment is already 23% and the agreed budget targets now imply a fiscal squeeze of no less than 5.5% of GDP over two years. There is, meanwhile, scant chance of the private sector providing a growth boost. Consumers are highly indebted and property prices continue to slide.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

That militates against consumption and highlights another problem: a lack of confidence in Spain's banking sector as the property value write-downs required by the authorities so far look woefully inadequate. The upshot is that Spain is set to get stuck in a Greek-style debt trap, "out of which default will be the only escape", says Wolfgang Munchau in the FT.