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POLITICAL ECONOMY
Spanish deal fails to ease eurozone fears
by Staff Writers
Madrid (UPI) Jul 20, 2012


disclaimer: image is for illustration purposes only

A deepening Spanish debt crisis has raised fears that Spain, not Greece, is most likely to sink the eurozone unless its financial wizards perform a miracle before September.

Eurozone finance ministers met to agree to lend Spain up to $122.9 billion to help shore up its banks but further problems await EU troubleshooters as heavily indebted Spanish regions emerge with pleas for further help.

Exactly how much will be needed to rescue the banks remains unclear. Findings from a major government audit of the troubled Spanish banking industry won't be known until September, when Spain's loan requirements for this purpose alone will become somewhat clearer.

Meanwhile, however, the regions are lining up for rescue, causing dismay in the markets.

The eastern region of Valencia said Friday it would apply to Madrid for financial help, but the government of Prime Minister Mariano Rajoy is already under pressure from other troubled regions while credit rating agencies pile on more downgrades.

Spanish bond rates Friday indicated investors saw the bonds as little more than junk raising the possibility the country was poised to join the inglorious lineup of debt-ridden eurozone members that already include Greece, Italy and Portugal.

Analysts said the Spanish crisis raised the prospect of the eurozone succumbing to the multiple pressures of cash requests from Spain that Europe's major economies can no longer fulfill.

Meanwhile, EU economists are revising downward growth prospects for Europe overall. Spain said its earlier estimates of gross domestic product rising by 0.4 percent were optimistic and a further shrinkage was in the cards.

Spain is in the throes of angry protests over Rajoy's austerity cuts that are likely to increase as growth prospects get dimmer.

That also raised fears that a new $20 billion fund designed to ease hardship in Spain's 17 semi-autonomous regions might not prove enough. The fund is part-financed with a loan from the state-owned lottery company.

Most of Spain's problems stem from reckless bank lending to fund a property boom that went wrong. Critics have blamed local governments for corruption and frivolous spending.

Government moves to discipline regions that overspend are flawed, critics say, because the central government cannot realistically take over and manage the finances of regions that it sees as flouting financial discipline. The expertise for putting in place such a supervisory financial network is simply not there, critics say.

European stock indexes tumbled Friday despite the eurozone finance deal for Spain.

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