Greek crisis haunts Spanish market

09:11, May 11, 2010      

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The Madrid Stock Exchange evolved from panic to euphoria thanks to a 750-billion-euro rescue plan announced by the European Union (EU). Spain's benchmark index, the Ibex-35, registered the highest increase in its history, recovering 14.43 percent on Monday.

Just last week, fears of a further spreading of the Greek debt crisis provoked the worst downturn in the market since the fall of Lehman Brothers.

The EU's rescue plan and the sale of bonds by 16 central banks in the eurozone also helped to ease the Spanish debt concerns. The premium on 10-year government bonds fell from 170 last Friday to 105 basis points on Monday. Spanish stocks benefited the most among the major European markets. Shares from the two biggest banks, Santander and BBVA, shot up more than 22 percent, pushing the Ibex to 10,351.90 points.

After a frantic week in which none of the 35 values of the Ibex managed to avoid the red, investors opted for the most damaged shares, forgetting momentarily about the worries of the solvency of eurozone countries like Spain at a time of mild economic recovery.

Amidst extreme volatility, these fears were fueled last week by mounting rumors concerning new cuts in the rating of Spain's sovereign debt or Spain's possible need for an aid package, similar to that agreed for Greece by the EU and the International Monetary Fund (IMF).

In this climate, investors hoped for a firm response on behalf of the political and monetary authorities to stop ongoing speculative assaults, which did not come until Sunday.


Statements by the Spanish prime minister were hardly of any use. From Brussels, Jose Luis Rodriguez Zapatero described these rumors as "absolute madness" and "colossal nonsense," stating that "these assaults have a cost to the country" and that "they will be fought back."

Other EU sources also dismissed such speculations as unfounded. European Commissioner for Economic and Monetary Affairs Olli Rehn denied on Wednesday that Spain will need an aid package, and President of the European Council Herman Van Rompuy confirmed at the same meeting that Spain's situation "has nothing to do" with that of Greece.

The following day in Lisbon, European Central Bank (ECB) President Jean-Claude Trichet also stated that "it is totally obvious" that the situation in Spain and Portugal is very different to that in Greece. But investors were hoping for something more. The ECB only announced that interest rates would remain at 1 percent -- a record low which has now been in place for one year -- despite hints that a further cut in the official price of money could be implemented in the eurozone.

Tensions in the debt market were high during the week. The extra yield that investors demand to hold Spanish debt instead of benchmark German bonds rose to euro-era highs. The premium on 10- year government bonds jumped as high as 173 basis points, though still far from the 973 basis points level for Greece.

Nevertheless, the Spanish Treasury managed on Thursday to place 2.34 billion euros in five-year bonds, albeit at 3.58 percent yield, the highest since May 2008. The sale fell below an expected 3 billion euros, but it must be remembered that this was the first bond auction after Standard & Poor's cut Spain's credit rating on April 28.

The situation forced an extraordinary meeting of the Eurogroup in Brussels on Friday. Heads of state and government of the eurozone agreed to the design of a stability plan to stop the wave of speculative attacks on the common currency. The plan intends to reinforce the 110-billion-euro aid package to Greece, which has so far proved unable to stop the risk of contagion to other countries in the region.

Spain will contribute to the Greece rescue plan with a 9.79- billion-euro loan. Spain's share of the EU aid package was approved by the Council of Ministers this week, a compromise adopted out of "solidarity" and "responsibility with Europe's present and future."


Meanwhile, the IMF asked Spain this week to "quickly" apply its fiscal adjustment plans to combat the deficit. According to Caroline Atkinson, head of external relations for the institution, Spain's situation is "different" to that of Greece. She also confirmed that the IMF will supply 30 billion euros in aid to Greece following its earlier agreement with the EU.

Spain's public deficit now amounts to 11.2 percent of GDP, the highest in the eurozone after Greece and Ireland. Zapatero's socialist government plans to cut the deficit back to 3 percent of GDP by 2013, in accordance with the limit set by the European Union's Stability and Growth Pact. Goldman Sachs described the Spanish austerity plan as "credible" and its fiscal projections as "good."

The government has designed a budget plan assuming that the Spanish economy will grow at a rate of 1.8 percent during 2011, increasing steadily to 3.1 percent by 2013. Among other measures adopted to overcome the current fiscal imbalance, the executive has announced a controversial increase in VAT beginning in July as well as a tax increase in interests derived from savings.

The European Commission does not share the Spanish government's optimism. Brussels warned this week that Spain will grow at 0.8 percent in 2011, ten decimals below the government's projection and nine decimals below the European average, which according to the Commission now stands at 1.7 percent.


Despite a torrid week in the Madrid Stock Exchange, mild signs of recovery are now in sight. According to the Bank of Spain, the Spanish economy technically emerged from recession while growing 0. 1 percent between January and March after almost two years of contraction. The official first estimate of first-quarter GDP will be published next Wednesday by the National Statistics Institute.

Another positive development during the week was a 5.4-percent increase in industrial production during March, the first rise in almost two years.

But the most worrying factor in Spain continues to be the unemployment rate, which surpassed 20 percent of the active population during the first quarter, with 4.6 million people still jobless. The employment reform is one of the greatest challenges the country now faces, especially given the lack of agreement between employers and trade unions.

Nevertheless, there was also encouraging news in this regard during the week. The number of unemployed people registered in National Job Centers declined by 24,188 persons in April, the first drop in nine months.



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