December 1, 2010 / 12:51 PM / 8 years ago

Analysis: Spain cannot defy markets without ECB support

MADRID (Reuters) - Spain cannot defy markets that are betting on a rising default risk, without the heavy artillery of the European Central Bank behind it.

The spread of the fast-paced crisis could drag the euro zone’s No. 4 economy into the same unsustainable debt spiral that has swallowed Greece and Ireland and threatens Portugal.

That would trigger a bailout so big that it would deplete European emergency funds to the point of exhaustion.

With the euro currency near three-month lows against the U.S. dollar and contagion spreading this week to Italy and Belgium — the latest targets for market sovereign debt sell-offs — economists say the ECB must take radical steps to keep Spain from tipping over the edge.

Prime Minister Jose Luis Rodriguez Zapatero has taken a defiant stance, saying he has adopted all the measures he can and that investors betting against Spain and the euro would lose.

Markets responded by pushing up the yield on Spain’s benchmark 10-year bond higher than 5.5 percent on Tuesday, once an unthinkable high but still below the 6.5 percent that analysts say will send Spain’s financing into an unsustainable spiral.

A week ago economists were urging Spain to speed up reforms and announce new measures to calm market jitters. But as the rot spread, they now say further gestures are futile.

“The ECB has got to take a stand and start buying bonds like crazy like the Federal Reserve. You’ve got to be quick and fight the speculators with their own weapons. Watching how the EU works it’s no surprise investors are taking refuge in the dollar,” said Jose Carlos Diez, chief economist of Intermoney brokerage in Madrid.

Spain has already passed an austere 2011 budget and has made progress in reducing its high deficit, overhauled labor laws and pledged to pass pension reform by March.

Economy Minister Elena Salgado repeated Spain’s message on Wednesday, telling lawmakers there were no more measures to be taken.

“You won’t move us from this,” the usually contained Salgado shouted in a tense exchange when the opposition in Congress blamed her for the crisis and prodded her for more action.

The government has thrown a few crumbs to markets in the past week, announcing more health checks on finances at local governments and banks.

And on Wednesday Zapatero said the government would sell stakes in the national lottery and state-owned airports.


The ECB has spent 67 billion euros in a debt-buying program since it started in May during the Greek debt crisis. Traders say so far it has largely bought Greek and Irish debt and stepped up Portuguese buybacks substantially this week.

Pressure on the euro zone’s higher-yielding debt eased on Wednesday as some traders bet the ECB could step up its bond-buying program.

Analysts said there was little to suggest an imminent change to the scale of the scheme introduced in May to stabilize markets, but nevertheless it was a risk that investors positioned for a widening of yield spreads could not ignore.

The Spanish government is not publicly asking for ECB help but a chorus of Spanish politicians and analysts have called on the ECB to make a move.

“If the ECB would do only a third of what the Federal Reserve has done as far as efforts in buying public debt, the speculation would be over,” former Prime Minister Felipe Gonzalez was quoted as saying in Expansion newspaper on Wednesday.

The ECB program is puny compared with the U.S. Federal Reserve Bank’s $2 trillion balance sheet expansion.

But some policymakers at the central bank are unwilling to buy lots more bonds on the secondary market because to do so would let leaders such as Zapatero off the hook of tough austerity measures that are required.

Spain needs a series of unpopular reforms, such as extending the age of retirement and further changes to labor laws — to modify business sector-wide collective bargaining contracts for union workers — to make its economy more competitive.

ECB President Jean-Claude Trichet said on Tuesday that the market purchases program was ongoing and that the Governing Council would decide how to proceed in the future, leaving the door open to increases.

The ECB should activate more bond buying as soon as possible, to fulfill its mandate to guarantee financial stability in the region as well as price stability, its primary objective, said RBS economist Silvio Peruzzo.

“We’re calling for a pre-emptive move, to avoid the contagion. That’s the only weapon in town. It’s ready, it’s powerful, it’s open ended to some extent,” Peruzzo said.

Other radical measures that have been considered, such as a joint euro bond — to which Trichet said on Tuesday “never say never” — would be too slow, he said.

Additional reporting by Robert Hetz; Editing by Alexander Smith/Mike Peacock

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