– Spain in a state of ‘total emergency’ (Telegraph, May 30, 2012):
Felipe González, the country’s elder statesman, said: “We’re in a situation of total emergency, the worst crisis we have ever lived through.”
Global financial markets lurched yesterday at the spectre of the eurozone’s fourth biggest economy being locked out of international capital markets and being unable to fund itself.
Spanish borrowing costs soared, while the Madrid stock market fell 2.6 per cent, the euro sank to a 22-month low against the dollar and the price of Brent crude dropped 2 per cent.
Meanwhile, global investors fled to “safe havens” sending UK bonds to another low. The FTSE 100, however, dropped 1.7 per cent, along with European and American stockmarkets.
The rout on global markets paused briefly around midday when the European Commission published a report calling for radical new support for “sinner states” across the eurozone.
The report said the eurozone should create a “bank union” under which all countries would stand behind stricken banks. The Commission’s top economic official also said he was “ready to consider” relaxing Spain’s deficit reduction targets.
However, stocks and bond markets lurched again when traders realised the ideas were just recommendations and were likely to be dismissed by Berlin anyway.
International confidence in Spain has drained since Mariano Rajoy, the prime minister, announced plans for a €23.5 billion (£18.8 billion) rescue of Bankia, the country’s fourth biggest lender.
Economists have warned that Spain does not have the resources to rescue the bank and Brussels has refused to help. A raft of other Spanish banks are also struggling under toxic property loans. The European Central Bank said savers withdrew €31.44 billion from Spanish banks in April alone.
On Tuesday night, Miguel Ángel Fernández Ordóñez, Spain’s central bank governor, resigned abruptly, before testifying to the senate that he had been muzzled to avoid inflaming events. Spanish tax revenues have collapsed, replicating the pattern in Greece. Fiscal revenues have fallen 4.8 per cent over the last year and VAT returns have slumped 14.6 per cent, while the cost of servicing debt has risen by 18 per cent.
Andrew Roberts, credit chief at Royal Bank of Scotland, said Spain was caught in a classic deflationary vice: a rising debt burden on a shrinking economic base. “Once you get into such a negative feedback loop, you can move beyond the point of no return quickly,” he said.
Yesterday Olli Rehn, the EU economic affairs commissioner, said he was “ready to consider” giving Madrid an extra year to cuts its budget deficit from 8.9 per cent to 3 per cent of GDP. However, Mr Rehn said Spain would first have to curb the spending of its regional governments and produce “solid” budget plans for the next two years.