How Spain’s Problems Got Worse in Less Than a Week
It’s easy to picture the grim surprise that Spanish officials must have when they learned on Monday that interest rates on the country’s 10-year bonds were going up again. They had an even worse shock on Thursday, when that same yield crossed the critical 7% line beyond which it is virtually impossible for a country to service its debt. After all, market pressure had just forced Spain to accept a rescue package for its troubled banks and surely, those officials must have believed, 100 billion euros would buy at least a little respite. Instead, they got one of the worst weeks in Spain’s economic history, and one that bodes poorly for the country’s—and Europe’s—future.
In the six days since Spain requested a bailout that for months its government insisted it would not need or take, Moody’s has downgraded the country’s debt rating to one notch above junk. The Bank of Spain released figures today showing that public debt has doubled in the last four years, from an admirable 35.5% percent of GDP in 2008, to a worrisome 72.1% in the first quarter of this year—the highest rate since 1913. Worst of all was the risk premium on Spanish debt (the spread between Spanish bonds and the safer German ones), which on Thursday reached a historic high of 550 points.
At least one Spanish economist says he saw it coming. “I said on Sunday that this was going to happen,” says University of Pompeu Fabra professor José Luis Peydro. “It was logical that the risk premium would go up once it became clear that Spain didn’t get as good a deal as it could have.”
Although the exact terms of the deal are still being worked out, Spain did not get, for example, the direct injection of European funds into its banks that it wanted. That would have allowed it to avoid adding the loan to its debt tally. And several European authorities suggested that the money would come from a European fund that gives the European Union seniority over private investors—essentially guaranteeing that if Spain could not meet all its debts, the E.U. rather than the private concerns would be paid back first. All of that has helped erode what little confidence the market still had in Spain.
The government’s handling of the rescue so far hasn’t helped matters. It has refused to call the package a bailout, referring to it instead as a “loan,” “a line of credit,” and in Prime Minister Mariano Rajoy’s euphemism of choice, “what happened on Saturday.”