ZURICH -- The headline on the website of the German newspaper Handelsblatt proclaimed: "Spanish flu infects the financial markets." It was just one of many recent headlines blaring negative news about crisis-stricken Spain, prompted by the rise in Spanish 10-year bond yields. For the first time since last November, these jumped above 6%. For Greece and Portugal, 7% pushed things over the top.

However, Jörn Spillmann, head of international economics at the Zürcher Kantonalbank, is not as pessimistic on the subject of Spain. "There are rays of hope," he said, pointing to labor market reforms and the possibility that the government could intervene to take control of finances in some of its autonomous regions.

"The labor reforms will help the Spanish economy become more competitive," Spillmann explained. For example, it will be easier for Spanish companies to lay off personnel. He is also expecting positive results from the law approved last week giving the central government better power over regional budgets. "This should help to consolidate budgets," he said.

The issue of regional budgets is what has set off the latest wave of concern – instead of the 6% budget deficit targeted by Brussels for 2011, Spain's deficit was 8.5%. For 2012, Spain set a new target of 5.8% but Brussels would only agree to 5.3%, with an objective of 3% for 2013. "Under present economic conditions, that's a tall order," said Spillmann. Investors fear that it could cause Spain to turn to the bailout fund.

The spectre of a real-estate crash

Along with government debt, Spain has another pressing problem: the threat of a real-estate crash, with a worst-case scenario having the government shoring up the banking sector. Unemployment figures and bad mortgage debts have been climbing side by side for a while now, although recently unpaid mortgages have been rising less sharply than unemployment. Unfortunately, analysts are worried that this picture is deceptive, and that the country will see a spate of bankruptcies linked to these bad mortgage debts.

However, a small beam of light glimmered Tuesday on the bond market. Yields for 10-year bonds fell during the morning by over 18 basis points, bringing them well under the 6% mark. And should the situation tense up again, market observers believe the European Central Bank (ECB) will step in as it did in Italy by buying Spanish bonds to calm market fears.

"They announced last week that they would," said Spillmann, adding that the institution would take its time and appear reluctant at first, in order to remind governments about the urgency of reforms.

The pressure Spain is under to recapitalize is – relatively speaking – much smaller than Greece's was before debt forgiveness. The Spanish government debt is presently around 80% of domestic gross product (Greece had reached an incredible 220%). Spain has to recapitalize some 180 billion euros in government debt in 2012. By comparison: Italy must refinance 340 billion.

Finally: Spain is benefitting from the fact that many of its citizens are prepared to relocate. With unemployment at 20%, many people are leaving the country to try their luck elsewhere. At least short term, this lightens the load on state coffers since less unemployment benefits and other social aid have to be paid out.

Spillmann was not prepared to predict when things may start looking up again for Spain, saying only that he wasn't "all too pessimistic." The bank analyst added that he expected Brussels to provide funds to cushion economic weaknesses. "Euro country governments have always found solutions," he said.

Read the original article in German

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