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Spain's prime minister Mariano Rajoy is under pressure - but Spain's problems might not be all his own fault. Andres Kudacki/AP
Debt Crisis

Explainer: Why is Spain under so much financial pressure?

The cost of borrowing for Spain keeps getting higher – fuelling rumours of needing a full-on bailout.

THE COST of borrowing for the Spanish government has hovered wildly in the last few days, as the world’s markets ramp up their expectations that it could be forced into needing a sovereign bailout.

Though the costs have abated a little in the last few days, they still stand at unsustainable levels – with Spain this evening being asked for 6.74 per cent interest to pay for a 10-year loan. That had stood at 7.62 per cent as recently as Tuesday.

But what’s causing all the fears about Spain’s economic future? Well, as you might have expected, it’s all to do with debts and deficits.

Spain has been in an ‘excessive deficit procedure’ since 2009, where it’s been following EU rules about how much its government is allowed to spend, how much its accepted to earn, and what it can pay its people.

Now, ‘excessive deficit procedures’ are not as uncommon as they might sound. Basically, they are what happen when a government’s deficit gets beyond 3 per cent of its GDP (that is, the total size of its economy).

When that happens, the EU steps in and oversees a government plan to bring the deficit back within the accepted levels of 3 per cent. (The terms of the Fiscal Compact mean that, from 2018, Ireland will be subject to a limit of 0.5 per cent.)

Ireland’s been in one since 2008, when the government’s property-dependant income went through the floor; our bailout programme will end in 2013, but we’ll be in this excessive deficit procedure until 2015.

Even Germany was in one until a couple of months ago; Greece (naturally) and Spain do too – in fact, Spain’s situation was in the news recently because the government announced a budget recently which put it at risk of not meeting its EU-endorsed deadlines.

A lethal cocktail?

So Spain has been in trouble for a bit – and even the recent policy shift at European level, where banking debts are now considered to be independent of government ones, doesn’t seem to have helped out.

Realistically, however, the crucial mix for Spain is that not only is the central government running major deficits, but so are many of the regional ones.

Spain has 17 autonomous regional governments, each with its own mini-government, a ‘president’, and a parliament.

And, quite simply, each of those is facing funding troubles too. Catalonia, which includes Barcelona, has a deficit of €3.4 billion this year. Valencia has formally asked for a dig-out of €18 billion. Murcia, a smaller region, needs up to €300 million.

By and large, the main concern about the state of Spain’s economy is not so much the debts of the central government – which are known to all – but rather the state of each of the regions which could needs ‘bailouts within a bailout’.

It’s those fears – that the regional governments are in bad shape, and possibly even worse than the central government itself – that are fuelling the current wave of negativity towards Spain, and the suggestions that it has no choice but to face a sovereign bailout of its own.

Read: Spain ‘discussed €300bn bailout with Germany’ – Reuters report

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