By Don Quijones, Spain & Mexico, editor at Wolf Street. Originally published as Wolf Street.
On Friday, Spain’s benchmark stock index, the Ibex 35, plumbed depths it had not seen since the worst days of 2013, the year that the country’s economy began its “miraculous” recovery. Of the 35 companies listed on the index, 15 (or 40%) are – to quote El Economista – “against the ropes,” having lost over a third of their stock value in the last 9 months. Only one of the 35 companies — the technology firm Indra — is still green for 2016.
This doesn’t make Spain much different from other countries right now, what with financial markets sinking in synchronized fashion all over the world. What does make Spain different is that it has no elected government to try to navigate the country though these testing times, or at least take the blame for the pain.
Inevitable comparisons have been drawn with Belgium, which between 2011 and 2012 endured 541 days of government-free living. However, Spain is not Belgium: its democratic system of governance is younger, less firmly rooted, and more fragile, and its civil service is more politically compromised.
To make matters worse, Spain’s richest region, Catalonia, which accounts for 20% of the country’s economy, bucked expectations last week by cobbling together a last-minute coalition government that seems intent on declaring independence within the next 15 months.
Meanwhile, business confidence, the cornerstone of any economic recovery, is beginning to crumble. Spain’s leading index of business confidence, ICEA, just registered a drop of 1.3%, breaking a straight eleven-quarter run of positive results. For the first time in almost three years more business leaders are pessimistic than optimistic about the economy’s outlook.
This should come as little surprise in a country where unemployment is still firmly on the wrong side of the 20% mark, over a quarter of the new jobs created last year had a contract lasting less than one week, and public debt is higher than it’s ever been [read: Six Nagging Facts About Spain’s “Recovery”].
And now that there’s no elected government in office, businesses that depend on public sector contracts, including the country’s heavily indebted construction and infrastructure giants, face weeks or perhaps even months of inertia.
“Everything has come to a standstill,” a contact in a Madrid-based research consultancy told me. “No decisions are being made, no funds are being released. It’s a vacuum.”
For the moment, the political backdrop has had limited impact on the price of Spanish government debt. The 10-year yield is at 1.75%, below the 10-year US Treasury yield, though it’s up a smidgen since the general elections on December 20. In its latest update, S&P left Spain’s rating unchanged, predicting 2.7% growth for 2016, despite the prevailing mood of political and economic uncertainty. In a similar vein, Deutsche Bank has forecast growth of 2.5%, regardless of what happens within or beyond Spanish borders.
In other words, every effort will be made to safeguard the economic order in Spain, including putting a ridiculously positive spin on a desperate situation. To paraphrase Europe’s chief financial alchemist, Mario Draghi: do not underestimate the amount of political capital that has been invested in the European project, in particular in the Eurozone’s fourth largest economy.
However, the leader of Spain’s Socialist Party (PSOE), Pedro Sanchez, doesn’t seem to have got the memo. A week ago he was in Lisbon to meet Antonio Costa, Portugal’s new prime minister, to seek advice on how to cobble together a broad coalition of left-leaning parties.
On Friday Costa, now in his second month of governance, announced a raft of economic reforms including a 5% rise in the minimum salary, reintroduction of the 35-hour working week for public sector workers and the cancellation of bank charges, one of the main profit sources in Portugal’s struggling financial sector – hardly the sort of measures that will endear Costa’s government to European institutions, especially given that Portugal boasts the second highest debt to GDP ratio in the world.
However, it’s one thing for an economy the size of Portugal to fall into the hands of political forces determined to reverse many of the economic reforms imposed by the Troika; it’s quite another when elected representatives of the eurozone’s fourth largest economy think of doing the same, especially during a year that Spain is expected to execute its biggest public spending cutbacks since 2010, when the Zapatero government froze public pensions, paralyzed public investment and cut public sector salaries by 5%.
Enter stage right the president of the European Commission, Jean Claude Juncker, who on Friday warned that he expects the formation of a “stable” government in Spain “as quickly as possible,” while emphasizing that he has no intention of interfering in the “exact composition” of that government.
Hardly comforting words given the Commission’s infamous role in the replacement, in 2011, of the elected governments of both Greece and Italy with technocratic regimes. Could history be about to repeat itself, or at least rhyme? The Commission already has enough problems on its hands – refugee crisis, stagnating economies, Brexit, Dutch referendum, an increasingly recalcitrant Italy and uncooperative governments in Poland and Hungary….
Given how much is at stake in Spain, things are likely to get a whole lot uglier before they get any prettier. Rajoy’s acting government has already accused Sánchez of seeking to break up the country by forging an alliance with Catalonia’s two main separatist parties.
A few days ago the Fiscal and Economic Crime Unit of Spain’s Policia Nacional announced it had launched an investigation into the finances of Podemos amidst allegations that it had received millions of euros of funding from the Chavez government in Venezuela and Iranian media. Serious allegations indeed, especially given Podemos’ leader Pablo Iglesias’ cozy ties with both.
As political tensions escalate, the chances of establishing even a weak interim government grow slimmer by the day. All indications point to new elections some time in the spring, meaning that the country will remain ungovernable for at least three or four months to come. In normal conditions this might not be much of a problem, but with the global economy edging closer and closer toward yet another fateful date with reality, Spain could well be on the cusp of a perfect storm.