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Investors worry as debt crisis looms

Published:Monday | April 16, 2012 | 12:00 AM


Spain has become the latest country caught up in the government debt crisis crippling Europe, sparking fears that it will join Greece, Portugal and Ireland and go asking for an international bailout.

Over the past week, investors have grown increasingly wary of buying Spain's debt on the international bond markets, sending the country's cost of borrowing to highs not seen in nearly four months and its stock markets plummeting.

In reality, worries about Spain have always been there. Bond market pressure on Spain began seriously to mount in 2011 as the country's deficit and unemployment rocketed.

Late last year, two factors helped ease this pressure. First, Mariano Rajoy's right-wing and pro-austerity Popular Party took over the reins after winning general elections in November.

But of much greater impact was the European Central Bank's decision to flood the region's financial system with more than €1 trillion (US$1.3 trillion) in bargain loans to banks.

The injection spurred lenders to snap up battered government debt, driving Spanish borrowing costs down. However, the effects of the cheap loans across Europe have since dissipated and Spain is taking the brunt of market distrust.

Rajoy's administration faces two big tasks: resurrecting an economy with 23 percent unemployment by creating jobs while trying to reduce its deficit to satisfy Europen Union overseers and international investors via austerity measures.

To help them achieve these, the government has already imposed draconian spending cuts as well as introducing labour market and banking sector reforms.

Meanwhile, Spain's banks are saddled with huge amounts of toxic real estate loans and some of the country's regional governments have spent way beyond their means.

Rajoy has warned voters that Spain is in for a rough ride, acknowledging that things will get a lot worse before they get better.