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Spain declines to rule out possibility of a bailout

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What's Happening?

The Euro Crisis should, in theory, be seeing an end in sight, with the second Greek loan finalised and the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF) set up for completion in a few years. The fact, however, is, that it still is. Even during the stalemate over the Greek debt situation, there were warnings that other European countries were also in the red.

In fact, the latest data shows that Greece’s industrial production has been falling – almost 12% in December, 6% in January and 8.3% in February and the economy is well into its fifth consecutive year of recession. Yet, Athens, which received its second bailout (including the first amounting to a total of €200bn), is not the only problem.

Aside from Greece, those bordering on excessive public spending that may spiral control are Ireland, Portugal, Italy and Spain.

Following the banking crisis, Ireland had asked for and received a bailout loan the previous year amounting to €85bn. Working in Ireland’s favour, the European Union leaders recently decided to reduce the interest rate on the bailout from 6% to between 3.5% and 4% and the length of repayment time has been extended from seven and a half years to fifteen years. This would save them up to €500-€700mn a year, which the government can spend elsewhere. This comes at a time when Ireland has slumped back into a recession again with GDP falling by 0.2% at the end of the previous quarter.

Portugal similarly has already received a bailout loan of €78bn in April 2011, but domestic banks continue to depend heavily on the European Central Bank for funding. The use has risen to a staggering €56.3bn as of March, well beyond the previous record of €49.1bn in August 2010 and up from €47.5bn this February.

The current biggest problem is the fourth largest economy in the Eurozone- Spain. The Spanish government have announced plans for cuts to the tune of €37bn (€10bn to be saved per year in education and health and €27bn as part of the deficit reduction plans announced in March) in an attempt to close the €15bn gap to fulfil their deficit target of 1.5% in 2012.

The Spanish minister for the economy, Luis De Guindos has, over the past week stressed the country’s commitment to reform in various interviews. With fears mounting that Spain may need a bailout loan, they are under pressure from the European Union to reign in public spending. In light of this De Guindos has stated that Spain may sell off public real estate. He also caused great chaos by suggesting that the rich be charged for public health services, where the sector is currently €15bn in debt. He stated, however, that Spain wouldn’t hike up the country’s considerably low VAT, stating that a VAT hike like in 2010 wouldn’t be very effective.