Why Spain is the big worry for the eurozone

Why Spain is the big worry for the eurozone

The euro slid hard against the dollar yesterday. The catalyst was a warning from credit rating agency Moody's that Spain's credit rating might be downgraded. Spain is the big worry for the eurozone. Ireland and Greece were nasty blips, but they could be coped with. Portugal falls into the same category.

But a bail-out for Spain would be harder to swallow. To sort that one out, the leaders of the eurozone would have to come to a much more long-term solution to the region's debt problems than the current sticking plasters.

Spain has three main batches of debt to worry about, says Robert Peston on his BBC blog. First, the central government "has to raise and refinance a very substantial sum in 2011, some €170bn." Foreign investors as you'll have noticed, aren't keen on eurozone debt just now. And the trouble is that Spain's government has historically relied on overseas buyers "for about 50% of all the money it raises." On top of that, there are loans from the regions – €30bn worth – that need to be rolled over next year. And another €90bn of borrowing by the banks.

That's all bad enough. But it could get worse. Moody's is worried that banks might have to raise more capital, which would probably have to come from the Spanish government. And there's also the danger that austerity measures aren't being imposed strictly enough. In all, Spain could end up needing to raise a total of €365bn, or 34% of its GDP next year. "To put it another way," says Peston, "2011 will be the year when the financial credibility of Spain – and by extension the eurozone as a whole – is likely to receive its severest test."