Will Spain be Bailed Out?

With Ireland the latest to fall victim to its own excesses all eyes now turn to the Iberian penisulla as Portugal and especially Spain begin to face the music:

If the markets are neither persuaded by the Irish bail-out nor reassured that Dublin will push through its budget, they seem almost as fretful about the Iberian countries. After Greece in May and Ireland this month, Portugal is clearly next in line. This week a general strike was called against budget austerity. Yet the Socialist-led government of José Sócrates has no alternative. Portugal’s banks may be healthier than Ireland’s, but the country is mired in slow growth and a large budget deficit. In the markets’ current mood, a bail-out similar to Ireland’s seems almost inevitable.

The real concern now is not Portugal but Spain. The Spanish economy is much bigger than those of Greece, Ireland and Portugal combined. The government’s financing requirement next year, though comparable as a share of GDP, similarly dwarfs those of Greece, Ireland and Portugal taken together (see chart 2). It is a Spanish mantra, requiring a mere change of name of euro-area countries, to insist that Spain is different. “We’re not Greece!” has become “We’re not Ireland!”, and will shortly become “We’re not Portugal!”

In all three cases the Spanish are correct, though that is not always a comfort. To start with, a bail-out of Spain would be on a different scale. When the €750 billion European Financial Stability Facility was designed in May, few people thought that it would be needed to cope with Spain as well as the other three weak euro-area countries. And there seemed little likelihood that it would have to.

On the bright side Spain has a debt of 53% of its GDP which puts its relative fiscal shape better then many others.