Argentina forces Spain closer to the precipice

Assets seizure deals new blow as Madrid struggles with bond sale

When it rains in Spain these days, it truly pours misery. Argentina announced on Monday that it is planning to nationalise an oil company, YPF, in which a Spanish firm, Repsol, has a majority stake. Coming at a time when the government in Madrid has just rammed through the most severe budget since the death of General Franco, this must feel like an economic insult for Spain on top of already intolerable injury.

The Spanish government has promised an "overwhelming" response to the threat to Repsol's financial interests in Argentina and the country's Prime Minister, Mariano Rajoy, is in South America to gather support from friendly governments such as Mexico and Colombia.

The Spanish company's shares fell by as much as 9 per cent yesterday. European Commission President José Manuel Barroso weighed in, saying he expected Argentina to abide by agreements. "I am seriously disappointed about the announcement," he said.

Madrid summoned Argentina's ambassador, Carlos Bettini, as the dispute threatened to evolve into an all-out trade war. "With this hostility, there will be consequences... in the diplomatic field, in the industrial field and on energy," Spain's Industry Minister, José Manuel Soria, said.

But the bitter truth is that Spain is in no real position to win battles abroad. Preventing the roof from falling in at home over the coming months will be difficult enough. Spanish unemployment levels, which were painfully high even in the boom years of the last decade, are now comparable to those seen in America in the depths of the Great Depression. Some 23 per cent of Spaniards are out of work, and youth unemployment in Spain has reached an agonising 50 per cent.

And, most alarming of all, Spain's borrowing costs have jumped in recent weeks, raising the prospect of national bankruptcy. The yield – or interest rate – on 10-year Spanish debt rose above 6 per cent in trading this week as investors' doubts intensified about the ability of the Madrid government to avoid having to seek a bailout from its European Union partners and the International Monetary Fund.

There will be an important new test of market sentiment tomorrow when Madrid attempts to raise €2.5bn in a medium-term debt auction. If investors refuse to lend to the Spanish government, or will only do so at punitively high interest rates, the panic will increase.

The government wisely took the opportunity of the period of calm in capital markets earlier this year to issue half of the debt it needs to finance its spending this year. But Madrid still needs a further €40bn to see it through to the end of 2012. If medium-term Spanish interest rates rise about 7 per cent, analysts predict that Madrid will be unable to avoid following Greece, Ireland and Portugal, and collapsing into the arms of the fraying EU safety net.

So how did Spain get here? European policymakers, particularly German ones, claim that "excessive state spending" was the root of the eurozone debt crisis. But while that was true of Greece, it was not the case in Spain, where the government ran a budget surplus going into the 2008 global banking crisis. What has dragged Spain to the brink of collapse is a massive housing and construction bubble which exploded four years ago.

The country's banking system is its weakest point. Last month Spanish banks were forced to borrow €316bn euros from the European Central Bank (ECB) because they could not raise credit from other European banks. Analysts estimate Spanish institutions to be sitting on unrecognised losses to property companies of up to €100bn.

Worse, the fates of Spain's weak banks are now entwined with the fate of the government in Madrid. The ECB flooded the European banking system with liquidity in December and February. Spanish banks used the cheap ECB loans to buy up Spanish government bonds, driving down Madrid's borrowing costs. But now, with sovereign interest rates up and fears rising about the health of Spanish banks, that virtuous circle has turned vicious. The more investors panic about Spanish banks, the more they panic about the Spanish state, and vice versa.

Can Spain make it without seeking help from abroad? That depends on whether Spain can regain the confidence of investors and generate the growth it requires to soften the impact of the austerity blows in store. The government plans to reduce its budget deficit from 8.5 per cent of GDP in 2011 to 5.3 per cent by the end of the year. To achieve this, it has outlined spending cuts and tax rises, over one year, adding up to €27bn.

But markets are waking up to the fact that all this austerity could prove self-defeating, sucking demand out of the economy as public-sector workers are laid off, taxes go up and government investment programmes are shelved. According to the IMF, the Spanish economy will contract by 1.8 per cent this year. That will push record unemployment and general misery still higher. Desperate though the Spanish population might already feel, the country's economic trials are only just beginning.

Suggested Topics
News
people
News
people
News
peopleStella McCartney apologises over controversial Instagram picture
Life and Style
Laid bare: the Good2Go app ensures people have a chance to make their intentions clear about having sex
techCould Good2Go end disputes about sexual consent - without being a passion-killer?
PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Richard Burr remains the baker to beat on the Great British Bake Off
tvRichard remains the baker to beat as Chetna begins to flake
News
i100
Sport
footballArsenal 4 Galatasaray 1: Wenger celebrates 18th anniversary in style
Arts and Entertainment
Amazon has added a cautionary warning to Tom and Jerry cartoons on its streaming service
tv
News
people
News
The village was originally named Llansanffraid-ym-Mechain after the Celtic female Saint Brigit, but the name was changed 150 years ago to Llansantffraid – a decision which suggests the incorrect gender of the saint
newsA Welsh town has changed its name - and a prize if you can notice how
Arts and Entertainment
Kristen Scott Thomas in Electra at the Old Vic
theatreReview: Kristin Scott Thomas is magnificent in a five-star performance of ‘Electra’
News
Destructive discourse: Jewish boys look at anti-Semitic graffiti sprayed on to the walls of the synagogue in March 2006, near Tel Aviv
peopleAt the start of Yom Kippur and with anti-Semitism flourishing, one Jew can no longer ignore his identity
Life and Style
Couples who boast about their relationship have been condemned as the most annoying Facebook users
tech
Arts and Entertainment
Hayley Williams performs with Paramore in New York
musicParamore singer says 'Steal Your Girl' is itself stolen from a New Found Glory hit
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Science Teacher

£100 - £110 per day: Randstad Education Group: Key stage 3 and 4 Teacher requi...

RE Teacher

£120 - £162 per day: Randstad Education Hull: Teacher of Religious Education ...

A Level Chemistry Teacher

£120 - £162 per day: Randstad Education Hull: A Level Chemistry Teacher - Humb...

NQT Secondary Teachers

£100 - £130 per day: Randstad Education Hull: Randstad Education is actively r...

Day In a Page

Italian couples fake UK divorce scam on an ‘industrial scale’

Welcome to Maidenhead, the divorce capital of... Italy

A look at the the legal tourists who exploited our liberal dissolution rules
Time to stop running: At the start of Yom Kippur and with anti-Semitism flourishing, one Jew can no longer ignore his identity

Time to stop running

At the start of Yom Kippur and with anti-Semitism flourishing, one Jew can no longer ignore his identity
Tom and Jerry cartoons now carry a 'racial prejudice' warning on Amazon

Tom and Jerry cartoons now carry a 'racial prejudice' warning on Amazon

The vintage series has often been criticised for racial stereotyping
An app for the amorous: Could Good2Go end disputes about sexual consent - without being a passion-killer?

An app for the amorous

Could Good2Go end disputes about sexual consent - without being a passion-killer?
Llansanffraid is now Llansantffraid. Welsh town changes its name, but can you spot the difference?

Llansanffraid is now Llansantffraid

Welsh town changes its name, but can you spot the difference?
Charlotte Riley: At the peak of her powers

Charlotte Riley: At the peak of her powers

After a few early missteps with Chekhov, her acting career has taken her to Hollywood. Next up is a role in the BBC’s gangster drama ‘Peaky Blinders’
She's having a laugh: Britain's female comedians have never had it so good

She's having a laugh

Britain's female comedians have never had it so good, says stand-up Natalie Haynes
Sistine Chapel to ‘sing’ with new LED lights designed to bring Michelangelo’s masterpiece out of the shadows

Let there be light

Sistine Chapel to ‘sing’ with new LEDs designed to bring Michelangelo’s masterpiece out of the shadows
Great British Bake Off, semi-final, review: Richard remains the baker to beat

Tensions rise in Bake Off's pastry week

Richard remains the baker to beat as Chetna begins to flake
Paris Fashion Week, spring/summer 2015: Time travel fashion at Louis Vuitton in Paris

A look to the future

It's time travel fashion at Louis Vuitton in Paris
The 10 best bedspreads

The 10 best bedspreads

Before you up the tog count on your duvet, add an extra layer and a room-changing piece to your bed this autumn
Arsenal vs Galatasaray: Five things we learnt from the Emirates

Arsenal vs Galatasaray

Five things we learnt from the Gunners' Champions League victory at the Emirates
Stuart Lancaster’s long-term deal makes sense – a rarity for a decision taken by the RFU

Lancaster’s long-term deal makes sense – a rarity for a decision taken by the RFU

This deal gives England a head-start to prepare for 2019 World Cup, says Chris Hewett
Ebola outbreak: The children orphaned by the virus – then rejected by surviving relatives over fear of infection

The children orphaned by Ebola...

... then rejected by surviving relatives over fear of infection
Pride: Are censors pandering to homophobia?

Are censors pandering to homophobia?

US film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence