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
Voices
voicesSiobhan Norton on why she eventually changed her mind
Life and Style
fashion Designs are part of feminist art project by a British student
News
Snoop Dogg pictured at The Hollywood Reporter Nominees' Night in February, 2013
people... says Snoop Dogg
News
i100
PROMOTED VIDEO
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Life and Style
food + drinkZebra meat is exotic and lean - but does it taste good?
Arts and Entertainment
Residents of Derby Road in Southampton oppose filming of Channel 4 documentary Immigration Street in their community
tv
Arts and Entertainment
The Tour de France peloton rides over a bridge on the Grinton Moor, Yorkshire, earlier this month
film
News
i100
Extras
indybest
Sport
Scottish singer Susan Boyle will perform at the Commonwealth Games opening ceremony in Glasgow
commonwealth games
News
Lane Del Rey performing on the Pyramid Stage at Glastonbury 2014
people... but none of them helped me get a record deal, insists Lana Del Rey
Arts and Entertainment
Dwayne 'The Rock' Johnson stars in Hercules
filmReview: The Rock is a muscular Davy Crockett in this preposterous film, says Geoffrey Macnab
Independent
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
santorini
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
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

SAP Business Consultant (SD, MM and FICO), £55,000, Wakefield

£45000 - £55000 per annum + competitive: Progressive Recruitment: SAP Business...

Java Developer

£40000 - £60000 per annum + competitive: Progressive Recruitment: My client, a...

SAP Functional Consultant (SD, MM and FICO), £45,000 - £55,000.

£45000 - £55000 per annum + Benefits: Progressive Recruitment: SAP Functional ...

Javascript Developer

£40000 - £60000 per annum + competitive: Progressive Recruitment: My client, a...

Day In a Page

Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

Noel Fielding's 'Luxury Comedy'

A land of the outright bizarre
What are the worst 'Word Crimes'?

What are the worst 'Word Crimes'?

‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
Can Secret Cinema sell 80,000 'Back to the Future' tickets?

The worst kept secret in cinema

A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Facebook: The new hatched, matched and dispatched

The new hatched, matched and dispatched

Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
Why do we have blood types?

Are you my type?

All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
Honesty box hotels: You decide how much you pay

Honesty box hotels

Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
Commonwealth Games 2014: Why weight of pressure rests easy on Michael Jamieson’s shoulders

Michael Jamieson: Why weight of pressure rests easy on his shoulders

The Scottish swimmer is ready for ‘the biggest race of my life’ at the Commonwealth Games
Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

The 'scroungers’ fight back

The welfare claimants battling to alter stereotypes
Amazing video shows Nasa 'flame extinguishment experiment' in action

Fireballs in space

Amazing video shows Nasa's 'flame extinguishment experiment' in action
A Bible for billionaires

A Bible for billionaires

Find out why America's richest men are reading John Brookes
Paranoid parenting is on the rise - and our children are suffering because of it

Paranoid parenting is on the rise

And our children are suffering because of it
For sale: Island where the Magna Carta was sealed

Magna Carta Island goes on sale

Yours for a cool £4m
Phone hacking scandal special report: The slide into crime at the 'News of the World'

The hacker's tale: the slide into crime at the 'News of the World'

Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
We flinch, but there are degrees of paedophilia

We flinch, but there are degrees of paedophilia

Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
The truth about conspiracy theories is that some require considering

The truth about conspiracy theories is that some require considering

For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn