Market Overview

More Austerity for Spain

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The Wall Street Journal reported on the new austerity measures being implemented in recession-stricken Spain on Wednesday morning. Spanish Prime Minister Mariano Rajoy announced measures that will help the country cut its budget deficit by 65 billion euros, or $79.62 billion through 2015. He also added that Spain's economy may not grow at all next year as the country has been under siege as a result of the European debt crisis.

The Prime Minister urged all Spaniards to back the initiatives, which the Wall Street Journal reports will include value-added tax hikes and cuts to jobless benefits and state employee wages. The European Commission supported the austerity measures, but a potential consequence could be slower growth. Rajoy called Spain's situation "extraordinarily serious."

He added, "We are trying to stick to a path that is not easy, short or comfortable, but we cannot avoid it—this is the only one that leads to recovery." The initiatives include an increase in the standard rate value-added tax to 21% from 18% and the lower rate would go from 8% to 10%.

The austerity measures are designed to convince the markets to buy Spanish sovereign debt, where yields have risen sharply. The steps may not be enough, however, to avoid a full-fledged bailout. European leaders have already agreed to support the country's banks with up to 100 billion euros, and Spain could need even more help.

Chief euro-zone market economist at BNP Paribas SA Ken Walttret told the Wall Street Journal, "The Spanish government is trying to convince financial markets that its policies are credible in order to generate some appetite to buy its sovereign debt, and that's quite a tough job now."

On Wednesday, shares of major Spanish financial institution Banco Santander (NYSE: STD) are around 1% lower in the wake of the austerity announcement. The stock has plunged more than 23% in 2012 and is a potential way to play the unfolding crisis in Spain.

The iShares MSCI Spain Index ETF (NYSE: EWP) is reacting positively to the statement from the Prime Minister and easing borrowing costs for Spanish debt. In early trade, the EWP had jumped almost 2% to $23.00. Nevertheless, the ETF has fallen more than 24% so far in 2012.

Posted-In: BNP Paribas SA Ken WalttretNews Events Global Economics Markets Media

 

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