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Spanish report Spanish report
by Euro Reporter
2011-11-12 11:07:03
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Spain seen as next eurozone victim by analysts

Spain may be the next victim of bearish investors in the eurozone bond markets because of its difficulty in meeting deficit reduction targets, weak economy and struggling banks, according to economists and analysts. Since August, international investors and analysts have focused their attention on Italy, and in recent days the cost of borrowing for the Italian state has risen to levels regarded as unsustainable in the long term. Spanish yields have also risen, but to a lesser degree. It was in August that the Italian “risk premium” – the bond yield differential with benchmark German Bunds – first rose above that of Spain, implying that Italy was less creditworthy than Spain. The gap widened as investors noticed that Italy’s debt burden as a share of gross domestic product was twice as high as Spain’s.

“For the time being, the market has given Spain the benefit of the doubt,” UBS said in an economics note on Europe published on Friday, noting that investors expected an incoming government after an election this month to make ambitious cuts to the budget deficit. It added: “We disagree with this relatively sanguine view.” UBS said it was increasingly concerned about Spain for three reasons: first, slippage in deficit reduction plans (the European Commission said on Thursday it expected the deficit this year to be 6.6 per cent of gross domestic product rather than the targeted 6 per cent); second, the possibility of a deep recession; and third, plans to help banks that could mean “a surge of liabilities being transferred to the government balance sheet”.

Elena Salgado, finance minister, said in Brussels this week that Spain’s risk premium in the bond markets was much higher than it deserved given the economic fundamentals, but that Spain was at least doing better than some of its fellow eurozone members. “There is universal recognition that Spain is in relatively a better situation right now than others,” she said.  The question is whether Spain’s Socialist government can retain the confidence of the markets until the election on November 20, and whether the new government, likely to formed by the centre-right Popular party, can continue to do so.


Basque separatist group ETA says weapons surrender next on agenda

The Basque separatist group ETA, which renounced violence last month after spending more than 40 years trying to shoot and bomb its way into achieving an independent state, now says surrendering weapons is on its agenda, a newspaper reported Friday. The Basque newspaper Gara, often seen as an ETA mouthpiece, quoted two members as saying that the group — severely weakened by years of arrests — is prepared for the first time to negotiate over its arsenal.

“The issue of weapons is included on the negotiating agenda between ETA and the State and we are willing to talk about it and to undertake compromises in line with resolving all the consequences of the conflict,” they said in a long interview with the paper. No such ‘negotiating agenda’ is known to exist and the word ‘consequences’ is often interpreted as referring to the 700-odd ETA prisoners held in Spanish and French prisons.

The members asserted that ETA has not renounced its goal of an independent Basque state. Neither was named, because ETA is classified as a terrorist organization in Spain and naming them would presumably have led to their immediate arrest. In a much awaited statement on Oct. 20, ETA declared a halt to its campaign of violence. It said it now backs only peaceful means for achieving its goal.


Poison lingers from Spain's property binge

Valencia's dazzling City of Arts and Sciences, with its glazed domes, turquoise pools and cloistered pathways, was built by the regional government during Spain's boom years of easy money and uncontrolled building. Now the centre, inaugurated in 1998, is a monument to a disastrous construction lending spree that has crippled Spain's banks and threatens to undermine government efforts to avoid insolvency as the euro zone debt crisis deepens.

The complex, encompassing an opera house in white ceramic mosaic, a planetarium and Europe's biggest aquarium and partly financed by unlisted regional banks, or 'cajas', made losses of 51.2 million Euros (43.8 million pounds) in 2010, with debts of over 700 million Euros at end-December. Unsustainable lending to private developers, government and individuals was the hallmark of Spain's decade-long property boom, fuelled by ultra-cheap interest rates after the country joined the euro zone in 1999.

Cajas were at the front line of the credit binge. These lenders were first set up hundreds of years ago to tide over farmers at times of poor harvest, with a remit to donate some of their profits to charitable works. Many were used by local politicians to fund pet projects and morphed from modest provincial lenders to real estate speculators. In recent years, cajas made up about half the country's banking system. "Those that were well-run were very cautious and didn't get their fingers burnt," says Charles Powell, history professor at CEU-San Pablo University.

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