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Boston, MA -- (SBWIRE) -- 03/01/2013 -- Core Views
We believe the EUR100bn bank rescue announced in June will mark the first of many external bailouts for the Spanish economy, and in light of the rapid worsening of financing conditions in recent months, we expect Spain to receive a full-blown sovereign bailout in the next six months or so. Alongside the continued deterioration in economic activity and confidence across the eurozone, this underpins our dismal outlook for the Spanish economy over the next few years. All components of GDP by expenditure are set to suffer given the pressures facing the housing, banking, fiscal and external sectors of the economy.
In light of the depression scenario envisaged for the domestic economy over the next few years as well as the prospect of continued aggressive fiscal austerity, we expect Spain's external asymmetries to continue narrowing over the medium term, even taking into account lacklustre demand for Spanish exports from abroad.
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Spain's crisis appears to have accelerated since Prime Minister Mariano Rajoy came to power and this is at least partly the result of weak, and at times delayed responses by the political leadership to the country's economic woes. With a eurozone sovereign bailout for Spain looking unavoidable, fiscal austerity unlikely to moderate, and a lost decade ahead for the domestic sector, we believe the People's Party will find it difficult to arrest the decline in its popularity, leaving re-election in 2015 looking highly unlikely.
Key Risks To Outlook
The biggest domestic risk to the Spanish economy is that the government pursues over-aggressive fiscal austerity. If the government is forced to introduce even greater spending cuts and tax hikes over the next few years owing to financial pressures from abroad, the ultimate effect on the government's fiscal position could be even worse given how weak the domestic economy already is.
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