It is costing Spain more and more to get financing because bond yields and the risk premium are rising. Money is more expensive, so the federal government should set aside special funds to cover the interest.
Logically, profits made on interest would stop going to other lenders. In 2011, interest payments on public debt will equal 2.5% of the GDP and indicators suggest that it will continue to increase slowly.
And the repercussions are that companies and banks will also have to pay more for credit. The net effect is that recovery and employment will stagnate.
This situation is owed to Zapatero's sad economic legacy, which has raised doubts about Spain's credibility in the markets. Other factors feeding this skepticism are the risk premium and fear that the peripheral debt crisis will spread to other countries. The lack of hard-hitting reforms and the Cabinet's timorous measures have stymied any trace of confidence.
This translates into higher financing costs (explaining why Moody's is eyeing the Spanish economy closely) and a sordid spiral that is tainting the next government's ability to effectively manage the economy. With these factors, holding early elections was the only solution, a decision that was reached but not executed on yet. It seems like Zapatero would want to extend his time in office long enough to spoil his successor?s plans as much as possible. Pure hogwash.
