The markets have been looking up in recent days, mostly on news that European countries have been having good bond auctions. These auctions have lowered the yield of bonds sold by these countries, somewhat counteracting the effects of the recent S&P downgrades. I have explained how changes in bond yields affect a country’s finances here. In this round, it was Spain who once again had a good bond auction, reducing their cost of borrowing (they did so a few days ago as well). This is definitely good news for Spain, which had its credit rating decreased from AA- to A by S&P on Friday. This means that Spain won’t have such a hard time paying its bills in the short run. However, in the long run, Spain still needs to decrease its budget deficit and increase economic growth. This combination is difficult to do because government debt is so high that Spain is not able to take on further spending. If it were to do so, it would almost certainly face another downgrade. As of 2010, public debt was over 60% of GDP.
For the moment, Spain has to cut spending and raise taxes, which it did in December to the tune of $19.3 billion. While that is good, it’s pocket change compared to Spain’s national debt, which as of December was at least $915 billion. In the future, we will see more large spending cuts, as many of its autonomous regions have spent much more recklessly in the past decade than the government has. For economic growth, Spain will have to hope that regulatory changes and European negotiations will help boost its economy in the long run. In the end, however, the economy will likely have to suffer, as government works programs and schools have suffered heavily from these cuts. With an unemployment rate already at 22% (who knows what underemployment looks like), Spain has a very difficult balancing act to do, and actions taken during the next few months will greatly affect Spain’s economic future in the long run.