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Spain Debt Will Test Europe

Spain’s debt load may dissolve the EU.

April 5, 2012- Everyone was concerned about Greece’s second bailout in order to get the euro zone back on track. However, the real test to turn around the economy in the area may be Spain. The government of Spain recently put a new austerity plan in action, but investors do not seem to have faith in it. This worries many analysts. They say it not only threatens Spain but the entire European Union.

On Wednesday, an auction involving Spanish bonds was the first sign about the new budget in Spain. The result was not what Spain or the EU wanted. Demand was very low and prices dropped. The cost to borrow with 10-year bond yields hit 5.7%, making it the highest rate since the end of 2011.

The problem is not the lack of a good austerity plan on the part of Spain. Spain, because of EU orders, has promised to face the tightest squeeze fiscally that any European economy has ever had to face. Just this year the plan includes the budget deficit to drop from a current 8.5% of the GDP to just 5.3%.

Since there is already shrinkage in the economy, this requires fiscal tightening of over 4% of the gross domestic product, in an economy that already is carrying an unemployment rate of 23%.

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