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Spain: Perils of being 'filthy stinking poor'

By Oliver Joy and Irene Chapple, CNN
October 3, 2012 -- Updated 1028 GMT (1828 HKT)
Medical workers demonstrate in Madrid against the Spanish government's latest austerity measures to deal with Spain's crippling debt. Medical workers demonstrate in Madrid against the Spanish government's latest austerity measures to deal with Spain's crippling debt.
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Spain in crisis
Spain in crisis
Spain in crisis
Spain PM under pressure
Spain in crisis
Spain PM under pressure
Spain in crisis
Regional splits
Miners protest
Bankia most indebted bank
Demonstrations against austerity
'Indignant' challenge
Crowds gather
Health workers protest
Spain's banks stumble
Bankia's bailout
Spain gets aid
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STORY HIGHLIGHTS
  • Spain faces regional dissent ahead of local elections, 20 billion euro in debt repayments due this month
  • Spain is already poised to tap Europe's bailout funds to help its banks, which require almost 60 billion euros
  • The eurozone's fourth largest economy will need a sovereign bailout, market watchers say

Editor's note: Watch more on Spain's crisis on Quest Means Business, CNN International, 0600pm GMT and 0800pm CET. It is presented by CNN's foremost international business correspondent Richard Quest. Follow him on Twitter.

London (CNN) -- Spain, one of the eurozone's economic giants, is widely expected to become the bloc's next victim of the debt crisis.

The eurozone's fourth-largest economy appears headed toward a sovereign bailout, market watchers say. The question now is when.

Spain faces regional dissent ahead of local elections, 20 billion euros ($25 billion) in debt repayments this month, violent protests on the street, savage budget cuts and devastating unemployment rates.

Analysts and economists canvassed by CNN say the issue is whether the country can survive the near term challenges or be forced to seek assistance within weeks.

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Spain has tried to stem its crisis with a tough budget and an audit on its banking needs.

But its efforts face headwinds including pressure from the markets and contagion from frail eurozone members such as Greece and Portugal.

Crisis in-depth

According to Ralph Silva, director of Silva Research Network: "Spain is not 100% in control of its own destiny."

Daiwa Capital Markets economist Tobias Blattner believes the upcoming vote for independence in Catalonia -- the country's most fractious region -- could tip Spain into seeking a bailout. He expects the Spanish government to request external help between October 21 and November 25, when local elections will take place.

Blattner noted: "Market pressure is likely to rise ahead of the vote for independence in Catalonia as uncertainty over Spain's political cohesion will surge."

But Silva believes Spain will be able to hold out until January, despite the regional bickering. He told CNN: "These political disputes were never really addressed before because everyone was filthy, stinking rich. When you're filthy, stinking poor, everything matters."

Elisabeth Afseth, of Investec, told CNN that Spain's upcoming bond payments -- of 5.3 billion euros on October 29 and 15 billion euros on October 31 -- will leave the coffers "very empty." She added, "Assuming the Treasury has sufficient cash reserves to cover the October redemptions the next pressure point comes in January."

Spain: Gliding toward bailout?

While it is "difficult" to rule out a need for aid this year, Spain's situation is likely to drag on a little longer, she added.

James Nixon, chief European economist at Societe Generale, believes the risk of a bailout is not "imminent" but that another spike in the country's borrowing costs would likely be the catalyst for any request.

Spain is already poised to tap Europe's bailout funds to help its banks, which require almost 60 billion euros in support, according to last week's audit. Spain has 100 billion euros available to it after the Eurogroup in July agreed to assist the country to recapitalize its banks.

However, Spain has always said the bank bailout is not a sovereign bailout, unlike those given to Greece, Ireland and Portugal.

The banking audit showed seven of the 14 banks assessed -- accounting for approximately 38% of the Spanish banking system's credit portfolio -- failed the stress tests.

Spain's next crisis: Regional splits?

At a press conference in Madrid last week, deputy economy minister Fernando Jiménez Latorre said Spain may ask for 40 billion euros of European aid while the rest of the money could come from the banks themselves.

However, Silva said: "if you don't force mergers [between banks] 60 billion euros isn't going to be enough, its going to be closer to 100 billion euros."

And Daiwa credit analyst Michael Symonds, commenting on the stress tests last week, told CNN the country still faced the "heavy lifting."

He added, "Over the coming months, restructuring plans will need to be finished-off and approved, the architecture of the bad bank finalized, and the delicate task of haircutting subordinated creditors -- many of which are retail investors -- carried out."

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