The financial dominos in Spain are falling very rapidly now, and before too long the sovereign will be forced to apply to Europe for significant assistance. On the first day of the new week, the Spanish 10yr rose to 6.5% at one stage, not that far away either from the high reached in November last year or the 7% level that triggered bailout requests from the likes of Greece, Ireland and Portugal.
With the local economy imploding, the desperate position of Spain’s financial plight is worsening at break-neck speed. Regional finances are a train-wreck. Catalonia warned last week that it is about to run out of money completely, whilst Valencia stopped paying its suppliers long ago. Debt at the regional level is soaring - now EUR 140bn - and climbing quickly as large regional deficits refuse to come down despite the best endeavours of the central government. The latter has been exploring for more than two months ways to alleviate the crippling funding pressures being experienced by regional governments, but central government itself is severely constrained in terms of taking on any additional liabilities. As a sovereign, Spain in on the precipice of losing its investment-grade status; S&P for instance has Spain at BBB+. Two weeks ago, a plan was hatched whereby regional governments would obtain loans from the central government backed by local government revenues. In exchange, the regional governments vowed to implement significant austerity measures to reduce the size of their fiscal shortfalls.
At the same time, the Rajoy government is thrashing around attempting to resolve the country’s banking crisis. After Bankia’s emergency EUR 19bn bailout last Friday, speculation is understandably mounting that many more banks will require significant injections. Today’s El Mundo claims that an additional EUR 30bn is required to clean-up Spain’s banks. The latter continue their tardy approach to declaring NPLs – a report from the Centre of European Policy Studies declared that potential write-offs may total as much as EUR 270bn. That said the appointment of independent auditors to stress-test the entire loan book of Spanish banks is clearly forcing bank executives to come clean on their toxic assets.
Brussels needs to put the pizza-delivery companies on notice because there could be plenty of all-night emergency summit meetings over coming weeks to decide what to do about Spain. Most of the regions are toast, a number of the banks are toast and the sovereign will be also without outside help. No doubt the UK will have an extremely strong interest in developments in Spain – within Europe the UK is far and away the biggest lender to Iberia’s largest economy, with financial claims of almost USD 400bn at the end of last year (60% of the total for Europe).