Spain has been under heavy speculation and market bearishness in the past period as economic conditions continue to deteriorate with unemployment leaping above 20.0% and most importantly public finances worsen the budget deficit grows.
Good news though emerged from Spain today to slightly ease the tension. The economy managed to emerge of contraction by expanding a slight 0.1% in the first quarter despite the harsh weather conditions following 0.1% the previous quarter. On the year the economy contracted 1.3% down from 3.1% previous.
Spain was one of the most severely hit nations in the crisis due to the heavy reliance of the economy in the past boom on the construction boom and properties market, nonetheless the pressure on Spain grew with the rising concern over the Greek spread contagion.
Spain's borrowing costs surged and so did the cost to protect its debt from default, as it was with other euro nation, yet the Spanish sensitivity was under spotlight after the S&P downgraded their credit rating and signaled an negative outlook.
Spain remained confidence of its ability to meet its July bond redemptions and its ability to anchor its swelling deficit. Now with the loan package announced by the EU we are definite that default is not an option for Spain at all.
Though our fear remains on the call for Spain to introduce heavy spending cuts and tackle its deficit, though it is the needed measure, and the second fear is the fragile financial system and lack of regulations governing the banking system. Last week the opposition and the ruling parties agreed on broad guidelines to start the banking sector reform which is a key needed factor especially with a large number of undercapitalized banks which makes them more vulnerable and fragile to any shock.
Thereby, the growth is good just not enough to unload the bearishness off Spain which is likely to continue with volatile performance and possible return to contraction in coming quarters under current conditions.