Spain’s sovereign debt crisis: Round 2

It may look like a replay of last May and June, soaring bond yields and all, but there are some important differences between the current bout of financial market distemper and that of the spring. At face value, it is somewhat worse. The interest rate demanded of the Spanish 10-year bond is about 20 points higher than it was at its most back then, and the risk premium embodied in the difference between the yield on the German bund and the former is 40 basis points greater – in fact at a euro-era maximum.

But looking a bit beyond the immediate it is interesting to note that all this activity has not cut into euro exchange rates remotely as much as it did in the spring, that the price of gold –that asset most fiercely clung to by the sweaty palms of fear– is not repeating its earlier ascent but is instead showing signs of exhaustion at slightly under $1,400 an ounce and, most notably, the tenor of media reports of the event has changed radically. Almost nowhere to be found (excepting one British daily whose stock in trade is the demise of the euro) is the ill-concealed glee and macabre triumphalism epitomised by the coining of the term ‘PIGS’ –the ‘I’ in the original version not referring to Ireland, but to Italy– to single out the eurozone countries thought to be at financial risk.

Notwithstanding Prime Minister Zapatero’s most recent diatribe against speculators, in which he promised a Barcelona radio interviewer that they would “lose the shirts off their backs” if they bet against Spain, the partial evidence above probably leads to the conclusion that hedge funds and the like are not the driving forces behind the market pressures on the Spanish government. It is the far more dangerous ‘real money’.

When German Chancellor Angela Merkel proposed in October that bondholders might be required to share some of the burden of refinancing governments in distress (later saying that she meant in the future, but not right away) she set in motion a recalibration of the risk contained in the portfolios of pension funds, insurance companies and other long-term investors. The collapse of Irish government debt, and weakness of Portuguese and Spanish debt, was not inflicted by short- but by garden variety-sellers. These were people that owned the bonds but didn’t want them on their books anymore – so badly that they ‘hit the bid’ to get out.

As Victor Mallet points out in a recent Financial Times piece, there is probably not much justification for throwing Spain into the same basket as Ireland. The country’s financial problems are a product of excessive private sector –­not government– indebtedness and their books are in relatively good order. But that it has been is a testament to the ineffectiveness, so typical of a country that cannot get it into its head that other nations are more than mere providers of tourists sporting sandals and white socks who always pay the sticker price, of the Socialist (PSOE) government in the realm of public relations.

Zapatero’s puzzling decisions

What are investors to think when, following the successful passage of a public sector wage reduction, the introduction of legislation to reform the pension system and the hollow failure of a general strike called to protest these measures, Zapatero replaces his labour minister with a politician whose CV sports a long history as a labour union administrator and unilaterally volunteers to return to the bargaining table with the vanquished sindicatos?

And what to make of a silence so deafening from the offices of the thought-to-be reformed cajas de ahorros that both voices from the European Union and that of the governor of the Bank of Spain find themselves publicly calling on them to hurry up and finish the job of restructuring and recapitalizing themselves?

It is a little-mentioned fact that, despite its often anarchic appearance, the structure of political power in Spain easily becomes vertical in crisis circumstances. Perhaps the recent request for a meeting with Finance Minister Elena Salgado by King Juan Carlos offers the hope that the plan to implement much-needed reforms will get back on track.

Charles Butler is the publisher of Ibex Salad.