Spanish panic

By R.D. at The Economist Free Exchange “Something new is needed”. Indeed, something new is urgently reqired — ECB Quantitative Easing at least at the scale of BOE and US Fed. But the Germans won’t permit that. First the guilty must be punished. Meanwhile the beatings will continue until morale improves…

THINGS are rapidly getting worse in Spain. Bond yields have risen to over 7.5% today, on the back of a shaky government debt auction last Thursday, and the failure of one of its regions (Valencia) that now needs help from Madrid. In line with this bad news on the state of the government coffers, the cost of buying an insurance policy against Spanish default (credit default swap premia) is up, and is increasingly diverging from Italy’s (see chart). Investors’ views of Spanish companies are just as gloomy as of its government finances. The Spanish stock-market—the IBEX 35—is down 30% this year, as any expectations that company profits will lead to decent dividends anytime soon are thin on the ground. Things could get worse as the week progresses, particularly if preliminary measures of output to be released tomorrow are weak.


If Spain fails, yet another new plan for the euro zone will be needed, as Spain’s woes means three sets of existing ideas have been exhausted. First, Spain has already received the short-term treatment that was supposed to save it. A €100 billion bailout has already been set up, and approved last week by Germany. Second, another favoured response—booting out the head of government, to put in place a more market friendly leader—isn’t really justified. Since taking over in December 2011 Spanish prime minister, Mariano Rajoy, has worked hard to talk up its debt position and its banks; he has also largely put in place the policies demanded by Brussels (see here). Third, other potential boosts to the Spanish economy—things like productivity enhancing structural reform (see some ideas here)—are solutions to chronic weakness, and will take too long to help. Something new is needed.

(Via Free Exchange.)