BOND MARKETS:IT WOULD be easy for investors to assume that Spain – like Greece, Ireland and Portugal, those other fiscal offenders on the fringe of the euro zone – is being punished in the bond markets because its public finances are out of control.
Easy, but wrong, according to independent economists, market analysts and senior Spanish officials.
In retrospect, it is true that José Luis Rodríguez Zapatero, the Socialist prime minister, erred in following international fashion at the start of the crisis two years ago. He poured government money into the economy to help stave off another great depression, just as tax revenues were collapsing.
The result was a budget position that moved rapidly from surplus in the middle of the decade to a deficit in 2009 of 11.1 per cent of gross domestic product.
That was smaller than the UK’s deficit but large enough to attract unfavourable attention from financial markets.
Spain’s accumulated public debt though remains one of the lowest in the euro zone. At the start of this year, it was just 53 per cent of gross domestic product, half the level of Italy’s and, as Mr Zapatero and his ministers never tire of repeating, about 20 percentage points below the euro zone average as a proportion of GDP.
The absolute level of public debt is not therefore the reason Spain has become the latest victim of the bond markets.
Its cost of sovereign borrowing has risen sharply in the past week and the spread for Spanish 10-year bonds over German bunds – the extra interest demanded by investors to account for the assumed riskiness of Spain – spiked yesterday to more than 260 basis points, a record since the launch of the euro.
Spain’s real problem is its foreign exposure and its private debt. The Spanish private sector depended heavily on foreign credit during the heady years of economic expansion and excessive home construction in the years up to 2008, and the annual current account deficit soared.
When foreigners grow nervous – as they have in the past week after the announcement of Ireland’s bailout, that exposure makes Spain vulnerable to any sudden loss of investor confidence.
The uncomfortable truth is that no startling new facts about Spain’s financial position have emerged that could explain the fright in the financial markets over the past week. What has changed as a result of the Irish bailout are market perceptions.