Wednesday, June 2, 2010

Spain Following Greece?

Greece's government did the country no favours by issuing constant denials and contradictions when decisive action was needed. The Prime Minister repeated over and over again that his country did not need a bailout only to be shown up by later events. Ultimately, he had to eat a large dose of humble pie and take unpopular measures to address the underlying problems.

Now Spain seems to be following the same script. Via the NYT:
On Friday, Spain suffered another downgrade of its debt even as calls were increasing for early elections after the close budget vote. Together, the two events suggest to political leaders throughout Europe that voters and investors are fed up with the lack of resolve and leadership in dealing with the economic situation.

“The government made a real mistake in being late in recognizing this crisis and continues to make a mistake in the ‘drip by drip’ measures to solve it,” said Jordi Sevilla, one of Mr. Zapatero’s former ministers. “You can only get credibility by presenting one strong and coherent package.”
Coming up with something strong and coherent that would satisfy all the various constituencies is no easy task. And Mr. Zapatero is under pressure from all sides.
In light of the international rescue package for Greece, investors want Spain to demonstrate that it can cut its bloated deficit fast enough to avoid emergency aid. Given the size of the Spanish economy, a rescue would be much more costly than the Greek bailout. Yet a debt default or severe restructuring would be even worse, crippling foreign banks whose lending underpinned Spain’s debt splurge.
In neighboring Portugal, the main rival parties recently agreed on an austerity package, but in Spain the Popular Party voted against spending cuts last week, without convincing most analysts that it had anything better to offer.

With 25 billion euros in refinancing coming due in July and with Spain’s cost for issuing new debt now elevated by more than a full percentage point, Mr. Campa acknowledged that even the government’s best efforts may not appease impatient investors.
“We have to get ahead of the curve for the markets,” he conceded.

Fitch downgraded Spain's credit rating last week to AA+. The question is whether Spain's leaders will heed this message and swallow the bitter pill or continue with a drip-drip system of puny reforms. Recent incidents have proved that nothing short of decisive action on a massive scale will suffice to give markets confidence. Let's hope Spain got that memo.