Italy’s on fire right now, with yields on its 10-year bonds now above the danger mark of 7% and a record spread over the German benchmark of 5.55%. It wasn’t supposed to be this way: after Greece, Ireland and Portugal, Spain was supposed to be next up in the line of fire. Now I see Spain as a naughty sibling, trying nervously to evade notice in the shadows as its older brother Italy gets chewed out by the markets. But don’t let the press coverage fool you: Spain is still in deep, deep mierda. And while Italy’s bond markets may be much bigger, in some ways Spain has less hope for redemption. Here’s why:
- No political scapegoats.
Greece has the rebellious Mr. Papandreou with, as Martin Wolf so beautifully puts it, “his disruptive desire for democratic legitimacy.” (Which I applauded, by the way.) Italy has, of course, the rambunctious Mr. Berlusconi. Both are useful–one can point to them and say, “If they would only go away then all would be well.” The hope is that their departure would give rise to a fresh start and renewed commitment to reforms.Both have promise to leave (although with varying degrees of credibility.) If and when they go, the markets might have a relief rally. Yet there is no such scapegoat in Spain. Most foreign observers agree that Prime Minister Luis Zapatero has done an admirable job given the circumstances and, at any rate, he is not standing in the elections to be held on November 20th. Thus there’s no chance for the type of catharsis we might see when the current leaders of Italy and Greece leave the stage.
- Still paying a high price to borrow, despite ECB intervention and good faith economic reforms.
Spain’s 10-year bond yields are also at near-records. And this is despite Zapatero having undertaken reforms that have won what passes-for-praise from Angela Merkel. Check out yesterday’s chart from Bloomberg displaying how the perceived risk of Spanish bonds has increased over that of Germany’s in the past year.
- The economy is still in the toilet.
How does 21.5% unemployment sound, the highest in Spain for 15 years? For those under 25 it’s an astronomical 48%! Spanish GDP didn’t grow at all in the third quarter, and growth prior to that was anemic (0.4% and 0.2% for the first and second quarters, respectively.) The spectacular fall of the Spanish real estate market means that losses are still rising: the default ratio for Santander, the largest bank, hit 25% in September.
- Spanish banks are still in horrible shape.
Only this week Spanish bank BBVA estimated that the Spanish banks might face more than €60 billion in losses that they’ve not yet planned for. And these are losses generally related to Spain’s own troubled economy, vs. exposure to other troubled sovereigns. Mind you, the total combined market cap of the 5 largest Spanish banks is only €68.7 billion.
- The old EFSF was a dog, the new EFSF still is a dog & if Spain gets into trouble it will be an even worse looking dog.
Maybe that’s not fair to the canines. The EFSF was supposed to be the big aving grace of troubled eurozone countries. But the old EFSF has only about €440 billion in lending capacity and is seeing less demand for its own bonds. The proposals for levering up to create a new EFSF look equally unimpressive. And if Spain gets into trouble it can withdraw its commitment to fund (after all, it couldn’t be expected to save itself)–some €92.5 billion. So the puny fund will be even punier and in less position to help Spain, itself.
So even though Spain might wish that we’d forget about them, we really shouldn’t.