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Spain staggers as it exits bailout program

Spain has become the second of five beleaguered euro zone members, after Ireland, to exit its bailout program and the onerous conditions attached to it. It's yet another sign that the peripheral countries are slowly on the mend. But like its fellow dwellers on the bottom rungs of Europe's economic ladder, the currency union's fourth-largest economy is far from ready to contribute much to the region's budding economic revival.

What Spain gained from its European partners' injection of €41.3-billion ($62.8-billion) was time to restructure its sinking banking system and rebuild its tattered reputation with credit markets, dramatically lowering the cost of capital. But despite the successful rescue, some Spanish lenders remain loaded with troubled debt stemming from the collapse of one of Europe's biggest real estate bubbles and a chronically weak economy.

Spain managed to escape its second recession in five years in the last half of 2013. Yet debt is still rising as a percentage of GDP, and house prices, which have plunged as much as 40 per cent from their pre-recession peak in early 2008, have yet to stabilize. Nomura Global Economics forecasts another 5 per cent decline this year. As a result, the amount of dodgy bank loans is increasing. Spanish banks' ratio of non-performing loans edged up to a record 13.08 per cent in November from 11.8 per cent a year earlier. That's worse than Egypt and only slightly better than Ukraine.

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The Spanish banks have slashed their borrowing from the European Central Bank as their access to debt markets has improved. But their balance sheets are still awash in bad debt, making them reluctant to lend. And businesses and households are equally reticent about borrowing, as long as demand is weak and job prospects remain so grim. That's not a recipe for a sustained recovery.

Spain's economy expanded by a mere 0.1 per cent in the third quarter, which matched the growth rate for the euro zone as a whole, and 0.3 per cent in the fourth quarter. The IMF has hiked its estimate for Spain's economy to 0.6 per cent this year, slightly below Madrid's own forecast of at least 0.7 per cent and well below the 1 per cent it assigns to euro-zone growth as a whole.

But the IMF warns that the Spanish jobless rate will stay near current record levels – above 26 per cent in the fourth quarter, and more than 55 per cent among young people – for the next five years, unless the government implements more drastic structural reforms to boost labour flexibility and bring down costs.

That seems unlikely. Spanish Prime Minister Mariano Rajoy took a severe political hit for deep public spending cuts and unpopular labour-market reforms that reduced the power of unions in industry-wide bargaining and made it easier for companies to lay off workers or cut wages for economic reasons.

Mr. Rajoy has pronounced 2014 as "the year of recovery" that will feature a declining unemployment rate. He may have to settle for a bit more economic stability and several more quarters of appalling jobless numbers.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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