How Long Can Spain Take The Financial Heat?

BARRY HATTON

Imagine the interest rate on your mortgage going up and up until you can barely meet the monthly installments. How long do you hold on, scrimping and saving, before you throw in the towel?

That is the dilemma facing Spain, whose Prime Minister Mariano Rajoy is fighting to prevent his country becoming the latest ⿿ and biggest ⿿ victim of the economic crisis crippling the 17 countries that use the euro and ask for a full-blown government bailout.

The clock is ticking for the country, which is finding fewer and fewer buyers for its debt, sold on the market as bonds. Investors are charging the country increasingly higher rates so that it can borrow the money it needs to keep the economy and public services working.

Investors have taken flight as the uncertainty over the whether the country can afford to contain the problems in its banking sector and indebted regional governments continues unabated.

As demand falls for a country's bond, its price falls and the interest rate the country would have to pay to sell it rises. On the secondary market, where bonds are traded, the interest rate Spain would have to pay on 10-year debt has hovered around 7 percent for weeks. Most market-watchers think paying an interest rate of 7 percent is unaffordable for a country in the long-term. And it's also the pain threshold that eventually compelled Greece, Ireland, and Portugal to request billion-euro bailouts.

The 7 percent interest rate is "a totem, because it shows a total lack of confidence in the country," says Matteo Cominetta, a European economist at UBS.

"The problem is that rates at that level kill the economy and basically make any growth impossible," he said. "The road is getting narrower and narrower and in the end (Spain) will have to ask for an intervention."

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