Spain: A Quick By-The-Numbers

By Matt Phillips

As we’ve mentioned before, unless the markets calm down soon, Spain will likely remain a worry. We’ve previously spotlighted the funding needs of the country. Here’s a quick run down of numbers you can sprinkle liberally into your heated family Thanksgiving-weekend debates on European sovereign debt issues.

• The fourth-largest economy in the euro zone.
• Deficit-to-GDP in 2009: 11.1% (Ireland is 14.4%. Greece is 15.4%)
• Government spending as a percentage of GDP: 45.8%.
• Government debt-to-GDP: 53.2%.
• Unemployment rate: 19.8% in the third quarter. That is more than twice the European Union average, although the figure is down slightly from 20.9% in the second quarter.

All these numbers, and more, are available here.

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Spain: What Are Its Funding Needs?

By Matt Phillips

As we’ve mentioned before, Spain is the 600-pound gorilla in the room as we try to weather the the most recent spate of euro worries.

Part of the reason has to do with the size of the funding needs of the euro zone’s fourth largest economy. By “funding needs” we essentially mean the amount of cash the country needs to borrow or rollover to keep the lights on, keep paying government salaries and keep the government functioning.

For instance, Greece’s IMF/EU bailout came about back in May in part because Greece was facing an immediate need to ?go to the bond markets to borrow the 8.5 billion euros. But more broadly, Goldman Sachs analysts at the time pegged Greece’s funding needs at about 150 billion euros over three years.

Analysts at Brockhouse Cooper say in a note out Nov. 23 that the amount of borrowing Spain would need to do to pay for deficits and roll over loans it received in the past is much bigger. :

Spain’s funding needs are far larger than those of Ireland or Greece. Over the next three years, Spain will need approximately EUR 350 billion to roll over existing debt and fund deficits. This figure would probably exceed amounts available through the EFSF after loans are disbursed to Ireland and after subtracting guarantees from the weaker Eurozone members (including Spain itself, as it would not make sense for the country to guarantee its own debt through the EFSF).

The European Financial Stability Facility [EFSF] is the 440 billion euro bailout fund set up this summer by euro-zone governments to try to deal with the more indebted members of the monetary union. You can see, that a 350 billion euro bailout would be a fairly healthy chunk of that. That’s why the sight of those Spanish bond yields blowing out makes the good folks in Brussels rather nervous. As the analysts at Brockhouse Cooper put it: “Bottom line: If Spain finds itself in need of rescue funds, the EFSF will likely not be in a position to provide enough support and some recourse to IMF funds will probably be necessary. As a result, we do not believe that the European debt crisis is over yet.”

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Euro Area Woes Edge Toward Spain, Italy

By Neil Shah

The carnage in Europe’s smaller bond markets is continuing Friday, and the risk is that bigger, stronger economies like Spain and Italy might get infected.

Take a peek at the market for credit-default swaps, which insure investors against the risk of bond defaults. On Friday, the cost to insure Spanish and Italian government bonds against the risk of default suddenly jumped higher, echoing the rising insurance costs for smaller members of the euro bloc like Greece, Ireland and Portugal.

It now costs roughly $246,000 annually to insure $10 million of Spanish debt for five years compared with $235,000 on Thursday, according to data provider Markit. Ireland’s insurance cost jumped gain, to a fifth consecutive record of $610,000, a leap of $28,000 from Thursday evening. And the premium that Spain and Italy would have to pay investors over Germany to borrow from the capital markets has also edged higher.

More pressure on Italy and Spain -– Europe’s third- and fourth-biggest economies -– would signal a worsening of the region’s latest sovereign-debt flare-up. Spain’s central bank reported this morning that growth stalled in the third quarter, which won’t help matters in Madrid.

Since the euro-zone fiscal crisis erupted early this year, investors have narrowed their focus to Ireland, Greece and Portugal, which together make up something like 5% of the 16-nation euro zone’s economy. In other words, they’re minnows of no concern to the overall durability of the euro.

Given that, the euro has recovered from its crisis-driven weakness and is down only 1.4% against the dollar this year. European banking stocks have held up reasonably well. And as my colleague Stephen Fidler points out in a column today, the daily gyrations of credit-default swap prices should be taken with a grain of salt.

But things could get worse, analysts warn. Data provider Markit’s SovX Western Europe index, which tracks investor anxiety about sovereign default, jumped to a record Friday. There’s talk that Russia and Norway’s sovereign wealth funds are souring on Spanish and Irish government bonds. Investors may be a little worried about what will happen if one of Europe’s main “clearing” firms, LCH.Clearnet, hikes up the cost of trading Irish bonds next week, as has been mooted. (A clearer stands between a buyer and seller in a trade, making sure the trade goes through even if one party defaults.)

Lastly, there’s this Sunday’s local elections in Greece. Greek Prime Minister George Papandreou has warned that he’ll call snap elections in December if his party doesn’t do well. One of the things connecting Greece, Ireland and Portugal during this latest credit flare-up has been fears of political turmoil.

So, what’s next? Many analysts are saying the euro can’t possibly stay this resilient against the dollar given the raft of problems licking at its edge. “There is every chance that peripheral Europe weighs on the euro into year-end,” notes Chris Turner, an analyst at ING in London. If the euro does take a major hit, that will probably wake U.S. investors up to Europe’s problems again.

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