Has the bears' case against Spain gone down the pan?

It was supposed to be PIGS in the plural not PIG. The smart money was betting on all the Euro area's peripheral economies buckling including Spain and not just Portugal, Ireland and Greece.

As Portugal finally opted to accept a bailout package, the headlines inevitably posed the question "Is Spain next?" The markets answered pretty emphatically "No". Ten year Spanish government bond yields stayed steady at just over 5% as they have they have done all year (for comparison the UK equivalent is around 4%). Traders and investors seem to have been reassured that Spain's economy is in better shape and crucially the government debt in relation to the Spanish economy much smaller than Portugal's (63% vs 83%).

Also the Spanish government seemed to have been shocked into action last year and made some labour market and pension reforms, put up taxes and cut spending and made a start on clearing up the mess in its banking system.

Everything OK then? Of course not, Spain is barely growing (GDP up just 0.6% last year), the banks have a lot of Portuguese debt, the housing market is still a disaster area and unemployment is shockingly high. On top of that the ECB has chosen to put up interest rates by 0.25% which feeds through to the EURIBOR rate which sets most Spanish mortgage rates. By some estimates this, and subsequent rises that the market expects to see, could add 800€ to the cost of the average mortgage. And of course there are the strikes we have seen recently and some big job cut announcements (Telefonica to cut 20% of its spanish workforce). Add in rising petrol prices and higher taxes and Spain is not a bear that is out of the woods just yet.

From the ADVOCO website: Spanish Income tax rates 2011