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Spanish Death Spiral Continues


Spanish 5- and 10-year bonds are now priced as riskier than those of Ireland.

In fact, the divergence between the Irish and Spanish issues has become a gulf since the Spanish bank bailout. This is, at least in part, due to the difference in attitudes between the two governments: Ireland adopted a “clean sweep” approach which terribly overburdened the Irish government at the outset but is now showing improvement. Meanwhile, Spain adopted an incrementalist (a.k.a. “ostrich”) approach, with the result that the Spanish are now well into their fourth “definitive” financial sector reform and likely to see a fifth before too long. The loss of investor confidence has been devastating to the country and it’s ability to finance any sort of economic growth.


 The Spanish central government exceeded its year-end deficit target in June. If anyone thinks that the regional governments are doing better – well, I have some bridges to sell them in Brooklyn…

The Spanish death spiral continues as the government applies ever more rigorous austerity measures that the economy cannot bear. Many of the measures being imposed by the Rajoy government make sense; but they are “fair weather” measures that are normally imposed during good economic times, when the country can bear the pain. Applied during a recession, and they are likely to turn it into a depression.

Striking Asturian miners combat police

How much more pain can the Spanish bear? Already there is a marked increase in both planned and spontaneous work stoppages and protests. From the Asturian coal miners, whose fights with the police look more reminiscent of Syria than Europe, to government employees in Madrid. Spanish society might be reaching a limit of tolerance beyond which government measures meet increasingly costly noncompliance issues.




 Despite the new Law of Fiscal Sustainability, which allows the central government to intervene in regional finances if these fail to meet deficit reduction targets, it is likely that Rajoy’s government will meet very serious legal and procedural opposition – even from regions where the Populares are in charge. This could involve protracted constitutional challenges which will only exacerbate foreign investor doubt over Spain’s ability to meet targets in any meaningful length of time.

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