Britannia Radio

In Financial Times Deutschland  Wolfgang Münchau writes "In Anglo 
saxon countries investors are no longer asking if the EMU will break 
up, but WHEN.  They are assuming that Greece and Portugal WILL quit 
as there is now no alternative.     He goes on to speculate about 
Ireland, Spain and Italy. (worth the read!)     Here's an up-date on 
Spain.

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TELEGRAPH    4.2.09
Spain's downward spiral spooks bond investors
Spain lost almost 200,000 jobs in January in the worst one-month rise 
since records began, lifting the unemployment rate to 14.4pc and 
inflicting further damage on the credibility of the Spanish government.

By Ambrose Evans-Pritchard

The ferocity of the downturn has led to a sharp jump in borrowing 
costs for the Spanish state, which lost its AAA credit rating from 
Standard & Poor's last month.

A ?7bn treasury auction of 10-year Spanish bond on Tuesday saw yields 
jump to 137 basis points above German Bunds, a post-EMU high. Foreign 
investors were conspicuously absent, leaving Spanish banks to soak up 
the debt.

"This is a national emergency. The government is being overwhelmed by 
events," said Mariano Rajoy, the opposition leader. The mood has 
changed dramatically in recent weeks as debtors launch hunger strikes 
and one builder threatened to set himself on fire to protest the 
credit crunch.
Maravillas Rojo, the labour secretary, said four million people may 
be out of work by end of the year - up from 3.3m now. "We're 
suffering from a grave international financial crisis, lack of 
liquidity, and falling consumption," she said.

Spain is losing jobs at three times the rate of the US, in 
proportionate terms. Over one million Spanish men under thirty are 
unemployed, leading to a surge in applications to join the armed 
forces. Three quarters of the army candidates are being turned away.

Industry minister Miguel Sebastian has launched a "Made in Spain" 
drive, exhorting the nation to buy Spanish clothes and to take ski 
holidays in the Sierra Nevada instead of the Alps. He claimed that 
120,000 jobs can be saved if every citizen spends ?150 less this year 
on imports.

The campaign amounts to a partial boycott of foreign products and may 
breach EU law. It is the sort of protectionist reflex becoming 
visible daily in much of the world.

Mr Sebastian blamed the banks for causing the crisis by tightening 
credit. "We're losing our patience," he said.

But the banks themselves are coming under strain - even though they 
have held up better than Anglo-Saxon and German banks so far. Bad 
loans have reached 3.5pc and are expected to surpass the 8pc peak 
seen in the crunch of the early 1990s.

"Banks have closed the tap," said Jesus Barcenas, Spain's small 
business leader.

Finance minister Pedro Solbes says there is almost nothing Madrid can 
do to halt the downward spiral. "We have exhausted our margin for 
manoeuvre," he said.  [He could do much more outside the euro -cs]

While he has avoided blaming Spain's euro membership for the 
country's plight, there is no question that Spain's failure to adapt 
to the rigours of EMU is at the root of its structural crisis.

S&P said euro membership had become part of the problem since it 
prevented the country resorting to aggressive monetary stimulus to 
counter the housing crash, or from devaluing to restore competitiveness.

Spain has become trapped after letting wage costs rise faster than 
German and French costs for year after year, leading to a current 
account deficit of 10pc of GDP. The socialist government of Jose-Luis 
Zapatero has so far recoiled from imposing the necessary remedy of 
wage deflation. It may be forced to do so by the bond markets.
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