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Olympic Spanish Stumble

As the 2012 Olympics enters its third full day everyone is wondering how the London Transport Network will cope with its most mammoth challenge to date. With an estimated 1 million people joining the already overcrowded underground and overground services, many are predicting a catastrophic meltdown. But who knows, everything could run smoothly. This Olympics has already been full of surprises, and as of yesterday Mr Bean playing the piano with the London Symphony Orchestra isn’t the biggest.

On Sunday, European Football World Champions Spain were knocked out of the Olympic games after Honduras secured a shock 1-0 victory. The Honduras goal was scored within the first ten minutes and although Spain dominated the second half their efforts just weren’t enough.

Despite having one match remaining Spain will definitely be heading home early and disappointed; and the bad news just keeps coming for the nation as data confirms that the Spanish recession is deepening.

Last week, fears that Spain may succumb to difficulties concerning the repayment of its international debts intensified with the nations borrowing costs over ten years hitting the record high of 7.5 per cent and this morning data released by The National Statistics Institute of Spain confirms that in the second quarter of the year the Spanish economy shrank by 0.4 per cent, making it a full per cent smaller than a year ago. Although this data falls within expectations, this compares with a Gross Domestic Product (GDP) contraction of 0.3 per cent for the first quarter.

Now, Euro group leader Jean-Claude Juncker has asserted the necessity of European Central Bank action in slashing Spain’s debt costs.

Juncker announced to German and French press that: ‘We will work in close agreement with the ECB, and we will, as ECB President Mario Dradhi said, see results […] I don’t want to drive expectations, but I must say, we have reached a decisive phase.’

The ECB’s latest decision on interest rates will be announced on Thursday. They may also use that day to put to bed the rising speculation regarding the reimplementation of its bond-buying programme, the Securities Markets Programme (SMP), which was suspended at the beginning of 2012.

Under the programme, the ECB can purchase government debt from banks on the commercial market. This action aids the reduction of borrowing costs for governments without the ECB having to break with its constitution and lend to them directly.

Reference was also made by Juncker to agreements made during the last European Union summit concerning the European bailout fund, the European Financial Stability Facility (EFSF).

Although the ECB is prohibited from openly loaning money to governments, under the constitution of the EFSF it is permitted for the fund to buy government bonds on the primary market. Effectively, this could mean direct lending to indebted governments likes Spain.

Spain might be out of the Olympic football, but at least they now have the hope that co-ordinated action between the ECB and the EFSF could significantly reduce their borrowing costs, as well as those of other struggling nations.

With a meeting between the US Treasure Secretary Timothy Geithner and ECB president Mario Draghi scheduled, there are indications that hurdles may be overcome.

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