Spain Has 3 Options At This Point | Wall Street Oasis

Everyone knows Spain is in trouble. Its unemployment rate has jumped to 24%, while 10-year bond yields are at their highest level in over a decade. And perhaps worst of all, the government seems to have exhausted the most obvious policy tools?Spain has already hiked taxes, slashed spending and cut social benefits.

So what can Spain do? Here are 3 options for how Spain could turn things around, courtesy of the Financial Times:

Option 1: Full international bailout. Greece, Ireland and Portugal have already been bailed out, but Spain is twice as big as all those three combined. Ireland and Portugal both took international bailouts when their yields topped 7%. Spain is very close to that point right now

Benefits:

• Spain is on the brink of default right now, and an injection of capital could be a significant lifeline for banks.

Disadvantages:

• Wow, where do I start?.it would cost over $500 billion, would stretch EU resources to the limit, and would leave little left over in case France or Italy need help.
• An IMF bailout would come with strings attached (read: austerity)
• Moral hazard is always a concern.

Option 2: Bailout ?lite?. This scenario would involve using bailout money to recapitalize Spanish banks and could even lead the ECB to buy more Spanish bonds.

Benefits:

• Spain could use the money to revive its banking system, and this ?lite? version would be more manageable than a full-scale bailout (fewer strings attached).

Disadvantages:

• The ECB already tried buying Spanish bonds just a few months ago, and it wasn?t much more than a band-aid for Spain?s problems. Doing so again wouldn?t mollify investors for very long.
• They may be less severe than in option 1, but even small austerity measures required in return for aid could really sink an economy with such high unemployment.

Option 3: Sit tight and do nothing. Spain has already implemented bank reform, labor reform, and fiscal reform?some say patience is the best option.

Benefits:

• I don?t really see any here?I guess the bright spot is that exports are growing and Spain?s current account deficit is shrinking.

Disadvantages:

• Spain?s economy is expected to shrink 2% this year. Unemployment is approaching 6 million people. Business conditions are terrible. It?s unlikely that things will just work themselves out without some form of action.
• Greece illustrates just how detrimental austerity without growth can be.

As the 4th largest economy in the Eurozone, Spain?s problems are a big deal. I?m not saying these are the only options Spain will ever have to consider, but right now they?re certainly being discussed. Which of these options offers the best solution for Spain? I?m sure I?ll hear something about how these aren?t the only choices on the table, so is there a better course of action to save Spain?

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