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Comment

Spain is the sick man of Europe — but need not be contagious

The Kingdom of Spain still appears reluctant to accept an EU bailout, despite its mounting problems. Positive signs are beginning to appear for other periphery eurozone countries, but the dragging of Spanish heels could make all that good work redundant.

Spain can point to its near fully funded status for 2012 all it likes. But the fact is that next year it has more to raise than in 2012 (itself a tough target), its regional issuers are locked out of public markets and its fundamentals are shocking (one in four workers unemployed, anyone?).

Yields on its long term debt, which shot down following the unveiling of the ECB’s Outright Monetary Transactions scheme in early September, are rising again. Spanish policymakers may have thought the promise of a bailout was enough but the fact that 10 year Bonos are back trading with yields near 6% should be proof to even the most ardent anti-bailout cheerleader that yields only fell in the first place on the expectation of aid.

If all this affected just Spain it would be bad enough. The fact is that concerns around Spain will eventually spread to Italy and others — all at a time that those others have reasons to be a little cheerful. The Greece debacle rolls on, but other troubled sovereigns have shown promise.

The Republic of Ireland sold its first public deal since September 2010 in July. That positive sentiment has now spread through to its banking sector. Bank of Ireland priced the first bond, a covered bond, from an Irish bank without government backing in more than three years on Tuesday.

The Republic of Portugal still struggles for access but Banco Espírito Santo showed progress has been made for the country’s financial industry at least. It sold the first public senior unsecured deal from a Portuguese bank in more than 2-1/2 years late last month.

Among the peripheral countries that have so far avoided a bail-out, the Republic of Italy’s secondary spreads have begun to decouple from Spain’s, helped in part by a reduced funding need for next year.

A bail-out for Spain will not be a magic bullet for the country. The problems created by its property bubble and ballooning wages existed before the eurozone sovereign debt crisis and will no doubt exist for a long time after.

But by refusing EU help — and the conditions that go with it — the Spanish government risks prolonging destabilising market conditions for all SSA borrowers and moreover choking off its neighbours’ market access before they can consolidate their recoveries. 

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