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Black legend, revisited

1 June 2012 By Fiona Maharg-Bravo

Madrid’s elites profess shock at the fact that the country has been pushed to the brink. Spain’s top companies have even put together a report outlining the country’s strengths, and asking investors to look at the hard data. But laying the blame on ignorant investors, evil foreign media and the euro zone’s paralysis doesn’t help.

The frustration is understandable. Spain’s debt load is lower than the European average. The government feels it has kept its end of the bargain with its euro zone partners, making deep cuts to the budget and carrying out difficult reforms. And European inaction is destructive. After all, that’s why Italy’s sovereign bond spreads aren’t far behind Spain’s.

Meanwhile, business leaders point to Spain’s economic strengths: a robust export sector, a shrinking current account deficit, and productivity on the rise. The financial system is being purged of real-estate nasties. The report concludes that the country’s spread over German bunds should hover around 150 basis points – far below the current 540.

Uncertainty over the euro’s future has indeed hit Spain hard. But one of the country’s main problems is the lack of credibility of its successive governments. Instead of under-promising and over-delivering, Spain has done the opposite. Take the country’s banks. There have been five financial reforms, including two this year, and counting. The Bankia bailout ended up much bigger than the government ever admitted, and its refusal to allow an investigation into the fiasco is a worrying sign.

Or take the budget deficit. The 2011 fiscal deficit number has changed twice in the past five months, climbing from 8 percent to 8.9 percent. What’s more, communication from the government has been patchy at best, and investors have also been thrown off by the contradictory messages from the country’s ministers.

Markets hate uncertainty, and there is still too much of it in Spain. Investors are voting with their feet. And capital flight is likely to have accelerated in recent weeks. Spain won’t regain credibility overnight. But the country’s political and business leaders must be more transparent and own up to the full extent of the country’s problems. Then under-promise, and over-deliver.


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