With a new centre-right government making its first strides towards controlling its debts and reviving its banking system, Spain is once again returning to the headlines.
We’ve been watching Italy’s finances blow up for the last few months, charting the rise of sovereign bond yields and writing about its increasingly limited access to liquidity. Spain was affected too, but on a generally less threatening scale.
However, after a tame December and liquidity measures by the European Central Bank that depressed bond yields, ominous news about the precarious situation of Spanish banks and regions appears to be the newest focus of investor angst.
That’s evident in the rising yields on Spanish bonds today, even as yields on Italian bonds are flat. To the right, check out the change in Spanish 10-year government bonds which, though still below August and November highs, have reversed a downward trend recently.Although recent headlines detail positive government moves to keep the Spanish financial system afloat, they also indicate that its current situation could be far worse than investors have been thinking:
- The government quietly approved a program that would allot the Bank of Spain as much as €100 billion ($129 billion) to guarantee government bonds and keep liquidity in the system (via LNE.es).
- Reports are circulating today that the central government essentially “bailed out” autonomous community Valencia by implicitly guaranteeing a loan it would not have been able to repay by itself. The region’s government delayed by a week a payment on maturing debt to Deutsche Bank.
- Fitch yesterday cut its growth expectations for Spain, forecasting that its economy will see no growth next year and expand by just 1.5% in 2013 (via Xinhua).
- Rajoy announced last week that the country’s deficit will exceed the amount it initially predicted for 2011, coming in at around 8%. The country needs to reduce its deficit to 4.4% next year if it wants to meet EU targets.
- That was the impetus for a new round of emergency austerity measures to get spending under control before politicians finally vote on a budget in March.
But beyond the headlines, this refocusing of attention could be due to the fact that analysts have been waiting for the centre-right Partido Popular to take power since the summer, and that time has been a veritable lame-duck period for the previous administration.
In particular, investors are wondering whether Spain will pull an Ireland and consolidate the toxic assets of its troubled banks into a government-directed bad bank.
What’s more, the sharp decline in Spanish bond yields—particularly versus Italian bond yields—after the ECB liquidity measures last month could have been overly zealous. They challenged lows not seen since early last year, despite the fact that the situation of Spain’s banks is no better and the prospect of contagion arguably much worse.
If the trend in yields and news flow continues, then we could see things get worse for Spain in a hurry, regardless of what leaders are doing to mend the flaws of the Spanish banking system.
We should hear more about the Spanish government’s plans for future action as January wears on.