Spain is Turning Into an Economic Tragedy

via Marc to Market

The Tragedy that is Spain

The Greek PSI will be resolved one way or the other this week. Early reports suggest a weak start and the triggering of collective action clauses and credit default swaps remain a distinct possibility. Portugal is next and, although the credit dynamics and implementation of reforms are superior to Greece, the risk remains high that it will need a second aid package and/or debt restructuring, as it is unlikely to be able to return to the capital markets in H2 2013. With 2 LTROs and collateral liberalization, the 10-year benchmark in Portugal is yielding more than 13%, compared with a bit more than 12% at the end of last year.

However, the devolution in Spain is particularly troubling. The new fiscal compact had just been signed last week, which includes somewhat more rigorous fiscal rule and enforcement, when Spain’s PM Rajoy revealed that this year’s deficit would come in around 5.8% of GDP rather the 4.4% target. This of course follows last year’s 8.5% overshoot of the 6% target.

The problem for Spain is that the 4.4% target was based on forecasts for more than 2% growth this year. However, in late February, the EU cut its forecast to a 1% contraction. This still seems optimistic. The IMF forecasts a 1.7% contraction, which the Spanish government now accepts.

This will be the third year in 5 that the Spanish economy contracts.

Read the rest here.