Editor’s note: This article was first published in July 2012. It is news commentary from 21 July: Spain’s 7.29% borrowing cost, the 5.82% IBEX 35 fall and the Valencia region’s rescue request refer to that week. On 26 July Draghi gave his “whatever it takes” speech, and Spain never requested a sovereign bailout.
An unsinkable ocean liner was sailing full steam ahead just minutes before it sank. Europe is that ship, heading for a collision with hundreds of icebergs because its captains won’t steer the right course. On Friday came the ill-timed interview that the newspaper Le Monde did with the European Central Bank (ECB), the institution chaired by Mr Draghi.
It was an out-of-place piece that condemned Spain to a possible sovereign bailout, because in it he said he had not the slightest intention of buying Spanish debt, as that was not the ECB’s role. As we explained just yesterday, only the ECB buying Spanish debt can stop Spain’s risk premium from climbing. He did, however, insist in the interview that the euro was not going to disappear.
What’s curious, and strange at the same time, is that the interview was conducted on 18 July and published precisely on 20 July (a black Friday for the IBEX), on a day when the Spanish stock market looked set to rise. I say strange because nobody in their right mind would make such a comment in such a delicate situation.
At the same time, I’d like to think that the ECB, after seeing the rise in the risk premium and the interest rate Spain now pays to borrow on the markets (7.29%), is at least considering doing what it did with Italy when its bond yields went above 7%, which was to buy debt to calm the markets, since the interview took place before the markets’ dramatic reaction. If it doesn’t take back its comment, it is sending Spain into economic chaos and, as a result, it is not only condemning Spain, it is condemning the euro, and giving speculators what they want: more distrust of Europe.
Spain is Europe, and make no mistake: if Spain drops out of Europe, every European country will pay more interest to borrow, because institutional investors would see that the ECB has no interest whatsoever in helping its member countries. So what once made us strong and competitive and won us the trust of the outside world will destroy all of that in just a few days.
To put it another way: if my job were to wreck the European Union at any cost, after racking my brains for a way to do it and consulting the best economic experts in the world, we would end up deciding to do exactly what Mario Draghi has done with that statement.
Now let’s move on to the land of the “pushcart” mentality (Spain)
If Mario Draghi was ill-timed in his statement, here in Spain we are not known for our political and economic intelligence, let alone our tact, so the best idea we could come up with was to announce that the Valencia region was requesting a rescue on that very same gloomy day.
That second announcement, which I’m sure could have been delayed a few days, is what guaranteed the stock market its biggest fall in the last two years (5.82%). The Finance Minister, Cristóbal Montoro, also made his own splendid contribution by stating that the state coffers are empty and that we don’t know whether we’ll be able to pay. Thanks for encouraging foreign investment in Spain.
Since this seems to be a contest to see who can act the most foolishly, I invite other regions to request a rescue on Monday, so we can all go short and make money from the destruction of the country.
And now for the big bombshell
I’ve just seen on television that the measures Spain is being advised to consider if the ECB doesn’t buy its debt are the following:
- Leave the euro.
- Request a sovereign bailout.
- Default on its payments.
This means that, if I were an institutional investor, I wouldn’t invest in Spain right now even if they paid me a 20% return.
So, if Mario Draghi wants to sink Spain thinking it won’t affect Europe… fine (people can smoke whatever they like). But for Spain’s own leaders to now air more dirty laundry that only feeds the markets’ distrust is unforgivable.
And let me remind Mr Draghi that after Spain comes Italy, so he had better act accordingly.
Featured image: Αντώνης Σαμαράς Πρωθυπουργός της Ελλάδας from Greece, CC BY-SA 2.0, via Wikimedia Commons.
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