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Spain’s Economic Crisis Another Indicator of Worsening European Sovereign Debt Crisis

May 31st, 2010

The decision by Fitch, one  of the three leading ratings agencies, to downgrade Spain’s government debt to below AAA status is another manifestation of the deadly sovereign debt contagion that has becoming increasingly virulent since Greece’s public finances imploded. What was once a Greek debt crisis that Eurozone politicians were confident could be contained has now contaminated the entire fiscal edifice of the European Union.

As a further  sign of the deteriorating economic and financial situation in Spain, a growing number of Spanish banks are facing insolvency. There is an attempt by the government and central bank to arrange a shotgun marriage that will consolidate dozens of regional banks that are in fragile condition. This comes on the heels of a major austerity package  enacted by the Spanish government headed by Prime Minister José Luis Rodríguez Zapatero, which was approved by the national parliament by a single vote. This illustrates the fragility of the Zapatero government, at a times when further economic and financial shocks are likely, on top of a labor revolt against the austerity measures, similar to what is occurring in Greece.

The worsening news emerging from Greece, Portugal and now Spain are mere markers on a path leading to a profound sovereign debt crisis that will afflict not only the Eurozone and UK economies, but eventually Japan and the United States.

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