Editor’s note: This article was first published in September 2012 as market commentary from 6 September 2012, the day Mario Draghi announced the ECB’s sovereign bond-buying programme. The IBEX 35 level, the possible Spanish bailout and the forecasts all refer to that moment.
A few weeks ago I said it wouldn’t be normal for the IBEX 35 to be at 8,000 points given the unemployment rate and the economic data we have in Spain. Today I look at my stock market gains and returns and I’m pleased, but then I go out into the street, look at the situation we’re in and what’s coming, and honestly I’m not so pleased.
The markets seem to have calmed down in today’s session (for now, at least) thanks to Mario Draghi announcing that the ECB will buy sovereign debt from the countries in trouble that request help, but… they will have to accept what he called “strict conditions”. In other words, the ECB helps Spain financially in exchange for it jumping through whatever hoops it is asked to. So we are looking at a bailout that will probably deepen the recession in Spain, because our country already has more than enough cuts. What’s missing are proposals for growth measures.
Although the news apparently sparked euphoria on the stock market, at around 14:32 (when Mario Draghi was appearing before the press) there was a moment of doubt among investors, who didn’t hesitate to start selling out of their positions.
At first that fall made no sense, because it happened even after Draghi announced that the ECB would buy the bonds (which was exactly what we had been waiting for).
A few minutes later, euphoria took hold of the market.
Markets could still get a scare
We should tread carefully from now on, because despite Draghi’s announcement, the Government now has to study the conditions it must meet for the ECB to buy its debt. If the Government rejects the conditions, there will be no debt purchases and the stock markets would plunge again.
If the Government accepts the conditions of the bailout (because that’s what this is), I have no idea what the markets will do. But I could say for sure that if more cuts, adjustments or sacrifices are coming for Spaniards, consumption will remain stagnant, and so the markets would fall gradually every time new economic data comes out, because unemployment will keep rising, people will keep losing purchasing power and the recession will keep getting worse.
In short: although Spain is not Greece, we’re going to be under very similar control to Greece, since even the IMF will be in charge of making sure that Spain meets the still-unknown strict conditions.
The algorithm of logic says: Adjustments + Cuts + Austerity − Growth measures = Total failure.
Then they’ll say the ECB’s debt purchases don’t work, when the problem lies in the conditions attached.
Featured image: EU2017EE Estonian Presidency, CC BY 2.0, via Wikimedia Commons.
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