Spain tries to reassure markets after Portugal bailout

Spain is struggling to reassure financial markets that it will not be the eurozone's next debt domino to fall after neighbouring Portugal was forced to seek a rescue package. Spain's borrowing costs have risen after Lisbon began bailout talks with the European Union and the International Monetary Fund, and as rumours spread about Greece possibly restructuring its debt.
Madrid has insisted for months that there is not the slightest chance of its economy - the eurozone's fourth-largest - needing outside help. Nevertheless, the government is preparing new measures to stabilise the economy and to keep markets calm. The measures include a plan to fight the shadow economy - making up an estimated 8 percent of gross domestic product (GDP) - that is due to be approved on Friday. Portugal will be the third eurozone country to be bailed out after Greece and Ireland. Its failure to stave off the rescue stirred concern that Spain would be the next one to fall.
Spain's economy is as big as those of Portugal, Greece and Ireland put together. Its collapse would not only weaken the euro, but could also threaten the very existence of the common currency. Spain is currently struggling to recover from a recession brought on by the meltdown of its property sector and the effects of the global crisis.
The government expects the economy to grow 1.3 percent in 2011, but many analysts regard that forecast as optimistic. The main concerns include a 20 percent unemployment rate - the eurozone's highest - structural weaknesses such as the excessive weight of the property sector, and the liquidity problems of savings banks which had an important exposure to the real estate market.
The 2010 budget deficit of 9.2 percent was one of the highest in the euro area, though slightly lower than had been expected. In 2009, the deficit still stood at 11.1 percent. The government aims at cutting the deficit to 6 percent this year, and below the EU limit of 3 percent by 2013.
However, there is growing concern about Spain's ability to meet its deficit targets because of budget gaps in north-eastern Catalonia and others among the country's 17 semi-autonomous regions, the daily El Pais said Thursday. Spain's public debt is still below the EU average, but it has also been accumulating at an alarming pace. The debt now amounts to 60.1 percent of GDP, compared to 36.1 percent in 2007.
Spain is also exposed to Portugal's economic problems through its heavy involvement in the neighbouring country. Spanish banks hold about a third of international bank assets in Portugal, and Spanish companies invested more than 17 billion euros (25 billion dollars) across the border over the past decade. Most analysts nevertheless believe that Spain will be able to hold off a bailout on condition that it strictly adheres to the austerity policies and structural reforms that are underway.
Prime Minister Jose Luis Rodriguez Zapatero's government has cut tens of billions of euros in public spending. It has also adopted reforms to make the labour market more flexible, to raise retirement age and to restructure the savings bank sector. The government was accused of reacting belatedly and erratically to the economic crisis, but it is now seen as moving in the right direction. "The decisive (factor) for Spain are the measures taken to stabilise its economy and to reorganise its banking sector," European Economic Affairs Commissioner Olli Rehn said.