Spain and Greece Shatter Illusions of Eurozone Recovery

on Sep 27, 2012

President of the European Central Bank (ECB) Mario Draghi managed to sooth investors for a short period via his new bond-buying plan but did little to calm the angry crowds of Spain and Greece who simply refuse to accept more tax increases and spending cuts as the necessary evil required to fix their economies. Violent clashes between police and protesters erupted in both debt-burdened countries, shattering the temporary tranquillity of the past weeks.

Around 6,000 Spanish citizens marched before their Parliament building on Tuesday chanting for a resignation of the current government. The German newspaper Der Spiegel reported that riot police intervened and fired rubber bullets against the violent crowd. A total of 22 people were arrested and 32 injured, including four policemen.
“The prospect that Spain might prove as truculent as Athens on the subject of reforms is a particularly uncomfortable one, since it risks making the Greek situation look like a mere sideshow,” said Chris Beauchamp, market analyst at IG Index, for Bloomberg. *”Oh, and the Greeks are on strike again, just to underline this point.”*

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!m[](/uploads/story/474/thumbs/pic1_inline.png)Spain is also under the threat of a full-blown constitutional crisis as Catalonia’s president Artur Mas announced a snap election, which could potentially lead to the richest region declaring independence from Madrid. At least 50 percent of Catalonians believe they are carrying an unfairly large tax burden and would prefer to go it alone.

Simultaneously, Prime Minister Mariano Rajoy tries to convince his countrymen to accept the severely reduced 2013 budget, which he will unveil on Thursday. But even with the cuts, Spain’s deficit is bloated due to the recession and absurdly high 25 percent unemployment rate. Data from Tuesday shows that Spain will most likely miss its public deficit target of 6.3 percent as the central government alone accumulated a 4.77 deficit by the end of August.

On Friday, Moody’s is expected to publish a review of Spain’s credit rating and all evidence suggests a further downgrade of the debt to junk status. According to Reuters, on the same day a bank audit will conclude how much money Madrid needs from the already approved Eurozone bailout package of €100 billion (£80 billion).
This week Mr Rajoy moved one step closer to requesting aid via Super Mario’s fix-it-all bond-buying programme. The Spanish Prime Minister said in a Wall Street Journal interview that he would make the move if debt financing remained high for too long. “I can assure you 100 percent that I would ask for this bailout,” he told the journal while describing the situation he is facing as “fascinating.”

On Wednesday the Financial Times reported that yields on Spanish sovereign 10-year debt jumped by 30 basis points to 6.04 percent, their highest level since 6 September when the ECB announced plans of intervention in the bond markets for the sake of removing the risk of an Eurozone break-up.
Yesterday Greece faced a crippling 24-hour strike with flights and trains suspended, while shops and schools remained closed. Molotov cocktails were once again flying above the streets of Athens as the Greeks seem to firmly state their disdain for further austerity measures. Prime Minister Antonio Samaras is currently negotiating €11.5 billion in spending cuts his government is willing to impose in exchange for aid from the troika – the European Commission, the European Central Bank and the International Monetary Fund. The critical troika report, which would show the progress Greece has made so far and on which depends whether the country will be left to slide in bankruptcy, is expected by the end of October.


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