Warning as further pain predicted for Spain

Schroders’ chief economist, Keith Wade, has warned that Spain is in danger of becoming the new Greece as its economic crisis worsens. Following the recent cut in Spain’s credit rating to BBB- from BBB+, Wade said that while Spain plays a waiting game over requesting help from the European Central Bank, there is a growing danger of a run on the banks, as happened in Greece, when savers worry about the safety of their bank deposits. Wade said: “The same thing is now happening in Spain, where the danger is a run on their banks and potentially a Northern Rock situation in the Spanish banking system as a whole.” Wade said that the economic problems in Spain and other periphery countries, such as Italy and Greece, are causing a hidden balance of payments problem across the Eurozone, via the Target 2 system for interbank lending with the European Union. “Capital is flowing out of Spain, Italy and Greece and going into the core countries, mainly Germany, which is racking up large credits whilst Spain and Italy and the other peripheral countries are racking up large debits. With credits now approaching €1 trillion across the Eurozone, the longer this goes on, the more expensive it would be if a country were to leave.”

Wade added: “Unemployment is at frighteningly high levels in places like Spain; 25% of the population are unemployed and youth unemployment is 50%. That to me is a failed economic policy. These economies are trying to deflate their way out of a debt crisis so they keep tightening fiscal policy and trying to drive down inflation. If you drive down inflation, you make your debt problem more difficult to solve – in many ways that was the insight of John Maynard Keynes.” Wade said that he expected Spain to request a bailout from the ECB before the end of the 2012.