Spain’s latest headache

Markets have taken fright over Spain's regional debt crisis as Madrid struggles to contain Catalonia's drive for independence.

"The sugar rush" caused by the European Central Bank's (ECB) pledge to buy peripheral bonds in unlimited quantities has faded, says The Economist. Markets had another fit of the jitters last week as Catalonia's push for independence meant Spain had to grapple with secession as well as recession.

Disputes with the spendthrift regions will make it even harder for Madrid to enforce austerity. The Spanish government was widely criticised for dragging its feet over officially asking Europe for a bail-out (which would trigger the ECB's bond buying). That raised the prospect of having to agree to tougher terms later as bond yields soar.

Spain's latest budget, presented late last week, has only partly calmed investors' nerves. Further helpful structural reforms, such as clamping down on early retirement and new fiscal watchdogs for the profligate regions, were announced. Madrid also promised another €13bn of spending cuts and tax hikes, and said that it is on track to lower its budget deficit to 4.5% in 2013 after meeting this year's 6.3% target.

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Fat chance, according to pretty much everyone. The plans are based on the economy shrinking by just 0.5% next year, while the consensus is expecting a 1.25% decline. So the targets are unlikely to be hit and the vicious circle that all peripheral economies are stuck in will endure. "Fiscal shock therapy makes little dent on the deficit without a monetary shock absorber," says Ambrose Evans-Pritchard in The Daily Telegraph. It shrinks the economy and the tax base, making the debt pile worse.

Meanwhile, there are still fears that the government may have to provide more help to the banking sector, stretching the national balance sheet further. Last week's stress test doesn't look conservative enough, says George Hay on Spain has thus "missed yet another opportunity" to shore up trust in its banks.

Stronger countries agreed in June that the eurozone's rescue fund would take on the bank bail-out costs of Spain and Ireland once financial regulation was centralised. But now Germany, Finland and the Netherlands are trying to backtrack, says James Mackintosh in the FT so Spain and Ireland could be stuck with a higher bill than assumed.

Everyone had hoped that Europe's politicians would "take advantage of the breathing space created by the central bank's promise of help" to get on with tackling the crisis. So much for that.