Spain is counting on budget cuts and domestic appetite for its bonds to build a firewall against contagion as prime minister Jose Luis Rodriguez Zapatero warned investors would lose money betting against the nation's debt.
Spain, which has the euro region's third-highest budget deficit, says it won't adopt new measures to protect itself from Europe's worsening debt crisis after cutting the central government's budget gap by almost 50 per cent and taming regional spending. Providing support is about half of Spanish debt is held at home, more than in Ireland or Portugal, offering a line of defense against changes in foreign investors' moods.
"I should warn those investors who are short-selling Spain that they are going to be wrong and will go against their own interests," Mr Zapatero said in an interview with Barcelona-based broadcaster RAC1 today. He "absolutely" ruled out Spain would need a rescue.
Spain is trying to distance itself from other so-called peripheral nations after Ireland's request for a European bailout sparked a bond markets sell-off that pushed Spanish yields to the highest in eight years. The risk for Europe is that Spain's economy is twice as big as that of Greece, Ireland and Portugal combined, meaning the euro region's €750 billion bailout fund may not be big enough.
Finance minister Elena Salgado said Spain will provide more information on its banking industry to dispel concerns and regain investors' confidence. The government will take measures if there's any deviation from its budget targets, she said in Madrid today.
"I find it easier to argue in favor of Spain than six months ago because data now shows the deficit is actually falling," said Gilles Moec, an economist at Deutsche Bank AG in London. "Spain is in a very different situation" to Portugal or Ireland.
The central government's budget shortfall narrowed by 47 per cent in the first 10 months from a year earlier. That compares with a decline of 30 per cent in Greece and a 1.8 per cent increase in Portugal. Ireland's deficit is set to surge to an estimated 32 per cent of gross domestic product this year on the costs of shoring up its banks, prompting the bailout request that's fuelling contagion.
In Spain's case, about half its debt is held domestically, limiting the impact of foreign investors shunning bonds of the high-deficit nations. That compares with 17 per cent for Portugal, according to debt agency estimates.
Spanish banks have a "very different" view of the country's bonds than foreign investors and "more faith in thinking today is a buying opportunity for Spanish debt," Banco de Sabadell SA chairman Josep Oliu told a conference in Madrid late yesterday.
Spain's Socialist government has also brought into line the regional administrations that have enjoyed increasing autonomy from Madrid since the return to democracy in 1978, announcing on November 24th that they will publish quarterly, harmonised budget reports for the first time. The regions are on track to meet budget targets this year, Ms Salgado has said.
"They're coming around to see the need for greater transparency, which is important," said Angel de la Fuente, an economist at the National Research Council's Institute of Economic Analysis who has written books on regional economics.
Some regions were frozen out of debt markets this year. That put a break on spending said Jose Carlos Diez, chief economist at Intermoney Valores SA in Madrid, Spain's largest bond dealer. "It's not that they didn't want to spend, it's that they couldn't."
Still, the news from the regions did little to tame the surge in Spanish borrowing costs. Spain's 10-year bond yield jumped to 5.158 per cent today, pushing the spread over equivalent German debt to 246 basis points, near a euro-era record.
Bloomberg