“Spain is the key country about which I’m most worried,” Buiter, a former Bank of England policy maker, said in a radio interview today on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “It’s really moved to the wrong side of the spectrum and is now at greater risk of sovereign restructuring than ever before.”
Two years of debt-driven stresses in European markets have eased as Greece avoided a disorderly default, the building blocks of a new euro economic management system fell into place and the European Central Bank pumped over 1 trillion euros ($1.3 trillion) into the banking system.
“The European Central Bank has drowned the markets and the banks in liquidity,” Buiter said. “There’s a general feeling of near euphoria at the moment which leads those drowning in liquidity to believe that all troubles are over.”
Spanish bonds fell, pushing 10-year yields to the highest level in more than a month at 5.388 percent at 5 p.m. Madrid time, widening the spread over similar German maturities to 3.4 percentage points, 20 basis points more than yesterday.
Spain sold 5.04 billion euros of 12-month and 18-month bills at the lowest rates in almost two years yesterday. Still, the budget deficit, the fourth-biggest in the euro area, will overshoot its target set by the European Union for the second year in 2012 and overall public debt last year surged to the highest in over two decades.
The economy, the fourth-biggest in the euro area, is set to enter its second recession since 2009 in the first quarter as the deepest austerity measures in three decades crimp domestic demand and a contraction in the region weighs on exports.
Spanish export growth slowed in January to 3.9 percent from a year earlier, compared with 6.6 percent in December. The government predicts a 4 percent fall in domestic demand in 2012.
“Spain is one of the big losers in the first quarter, it has replaced Italy as the lightening rod in the second tier of the periphery,” said Marc Chandler, the head of global currency strategy at Brown Brothers Harriman in New York.
Euro-area finance chiefs agreed on March 12 that Spain won’t achieve its budget goal for the second year in 2012, easing the target to 5.3 percent of GDP from 4.4 percent, after the shortfall came in at 8.5 percent last year, compared with a 6 percent goal.
Greece, Portugal, Ireland
Buiter said Greece may need another bailout before the end of the year and no later than next year.
“The Greek sovereign is by no means on a sustainable path so they will have to restructure again,” he said.
Portugal and Ireland aren’t out of the woods either, Buiter said. Portugal is at a “very high” risk of a restructuring, which may occur next year, and Ireland needs “additional official sector support,” he said.
“The efforts for recapitalization in the case of banks and deleveraging for governments tend to slacken off” when they are no longer confronted with extreme difficulties in funding themselves, Buiter said.
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