The Markets Have Spoken

AP Photo/Daniel Ochoa De Olza
By David Bayon

According to Alberto Recarte, one of Spain’s leading economists and President of the media group, Libertad Digital, Spain needs at least EUR€150,000 million in order to survive 2011. For 2012, the amount would be slightly higher.

Consequently, Spain would require a total of approximately EUR€350,000 million for the next two years to stay afloat and avoid bankruptcy. Such an amount is the equivalent of three rescue packages for Greece or four for Ireland. There are slim possibilities of anyone being able or willing to finance it. The scenario could very well change from the “too big to fail” repeated by the Spanish Prime Minister Zapatero to the “too big to bail out”, which the markets are starting to hint at.

Spain represents one fourth of the European economy and 11 per cent of its GDP (Greece is only 3 per cent). With this in mind, the question would be whether Germany, even if it wanted to, could bail Spain out, after having done the same with Greece and Ireland and with a possible rescue of Portugal looming in the horizon.

International markets do not see this as feasible. The German bond, one of the most reliable in the world, is losing its credibility. Reservations are growing among investors toward the German Federal Reserve, as they suspect that their money could be invested in rescuing unreliable economies as the ones of Portugal, Italy, Greece and Spain.

Furthermore, Joaquin Almunia, Vice President of the European Commission responsible for Competition Policy, recently stated that there are severe doubts about Spain’s determination to adopt the necessary measures, and on whether the statistics presented by the Spanish Administration are credible. Coming from a European Commissioner who happens to be a Spanish Socialist, the impact has been demolishing. The Ibex (Spanish Stock Exchange) closed the worst month since October 2008 with a drop of 14 per cent. Investors, generous with those that treat them with honesty and diligence, show no mercy when they feel cheated.

As German bonds decrease in value, the situation becomes dramatic for such a country that happens to be doing its homework at a time of crisis. German Chancellor Angela Merkel has drastically reduced spending and implemented severe budget cuts. The German economy is saving, creating jobs and it enjoys an enviable commercial surplus thanks to its industrial dynamism. But why rescue those euro members that have acted irresponsibly and done the exact opposite?

After all, while Merkel is being exquisitely careful with German taxpayers’ money, Zapatero is risking not only the present Spanish taxpayers’ money, but also the future's finances. Instead of following the German example, Zapatero has ignored constant calls to decrease government spending to reduce its EUR€100 million deficit, and proceed to an in-depth reform of the labour market that would increase the competitiveness of the Spanish economy as well as lower the unemployment rate. Even today, as the country he presides over comes closer and closer to the point of no return, he refuses to make the painful yet necessary reforms. Some of his critics believe this is due to his particular ideological prejudices and the limited education in economics and finance of himself as well as of his entire economic team, including the Minister of Finance, Elena Salgado.

Germany does not have much choice. If it assumes the compromise of covering the EUR€350 to 500,000 million that the Spanish economy is going to need, it could be dragged down with it. This would lead to Germany having to be rescued itself by the International Monetary Fund. And that is a scenario that Merkel and the hard working Germans are simply, not willing to accept.


3 December 2010


Photo Credit: AP Photo/Daniel Ochoa De Olza