Portugal's ECB Call Puts Increasing Pressure On The Spanish Economy

Published: 9th September 2013

The Spanish government has moved swiftly to allay fears over the economy following the recent news that Portugal will be seeking a bailout from the European Central bank. The move, which is designed to draw a line under the European sovereign Debt Crisis, was made by Spain's economy minister on Thursday in response to the announcement last week that Portugal was seeking financing from the European Union.

Whilst the announcement in Portugal was widely expected, the move has undoubtedly increased attention on the Spanish economy and its weakened finances. Indeed comments from Lloyds seem to suggest that this increased level of focus on the performance of the Spanish economy is set to continue in the near future, as markets wait to see the results of the forthcoming Treasury bond auctions. Economy Minister Elena Salgado told national radio station SER "(The risk of contagion) is absolutely ruled out … it has been some time since the markets have known that our economy is much more competitive."

At the heart of the concern is Spain's reliance on the economic performance of its Iberian neighbour. With 8.5% of Spain's exports being sent to Portugal, the new-found austerity in the country is likely to have a knock-on effect throughout the Spanish economy.

Despite pulling itself out of two year recession cycle at the beginning of last year, the growth levels in Spain have slowed since, and predictions are currently suggesting subdued growth levels in the forthcoming months. With the Spanish economy currently struggling to come to terms with considerable cuts in public spending and changes in the labour market, it is likely to be some time until growth returns to the Spanish economy.

Whilst there is an increased focus on the performance of the Spanish economy, there does appear to be light at the end of the tunnel. Analysts at Credit Agricole said recently in a note to their clients "Portugal’s bailout request puts the likes of Spain under the spotlight, but we are of the opinion that Spain will not follow due to its improving fiscal situation and recovering economy, while also passing key structural reforms in the labor market and pensions."

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