Greece manageable for now but is Spain, Schroders asks

Greece can be managed in the near term if the political will is there to provide funding. But the same might not be true for Spain, where ten year bond yields have risen above 7%, with a rise in short-term rates and two year Spanish paper now trading near 5.5%.

“Such rates put government debt on an unsustainable path with the cost of borrowing well ahead of economic growth. We await the results of the independent assessment of bank losses later this week, which will give us a clearer idea of the scale of the bank recapitalisation required in Spain. The concern is that this will push Spain’s public debt to GDP ratio towards 90%,” said Keith Wade, chief economist at Schroders.

The real problem in Spain is growth, Wade said. “Our view remains that the combination of fiscal austerity, labour market reform and bank recapitalisation means that activity will stay weak, therefore maintaining the pressure for a bailout of the eurozone’s fourth largest economy.”

“Given that the Spanish economy is twice the size of Portugal, Ireland and Greece combined, it is also likely that any support would absorb much of the capacity of the European bailout fund, estimated at around €500bn.”

Meanwhile, following the election result in Greece, the asset management company has revisited its view of a ‘Grexit’ in the third quarter.

“The test in the near term will be whether the new government can negotiate an amended bailout, where the economy achieves fiscal stability over a longer time period and tightening is pushed out. Some official sector involvement (i.e. debt forgiveness by EU governments) may well also be needed. One measure of success will be if the tide of capital flight ebbs. However, it is a tall order and Greece may only have delayed, not dodged, an eventual exit from the single currency,” Wade said.

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