Calling foul in the eurozone: It's Spain’s turn

Here we go again. The inevitability of the eurozone is coming to the fore once more as persistent fouling spoils its weaker players

Spain vs Italy: a hotly contested affair both on and off the pitch
Simon Miller
On 10 April 2012 12:07

For Eurozone-watchers, the situation is like watching Mario Balotelli at Manchester City. As soon as the whistle goes, you count the minutes before the Italian does something reckless, stupid or downright dangerous and gets booked.

You know it’s coming, the ref knows it’s coming but the only thing you don’t know is exactly when.

With the Holy Weekend out of the way, it is the turn of Spain to launch the metaphorical studs up to the knee of the Eurozone.

Spain's economy minister Luis de Guindos has confirmed that the country is very much in recession with Q1 figures expected to see a similar contraction to the 0.3 percent of the previous quarter and the cost of insuring its debt keeps on rising, threatening the record 487 basis point seen in November last year.

As part of its membership of the euro, Spain has to get its deficit under control in the face of that recession and the markets are simply, and understandably, becoming increasingly concerned that the economy will continue to deteriorate and its banks will need bailouts.

This is the big one for the eurozone. This is not Greece, and the sums needed are not small. Although the long-term refinancing operation has offset the pain temporarily, this is at an end and for Spain the situation could get worse.

The problem with a bubble is that when it bursts it gets extremely ugly. Just last Summer I was visiting my brother and his Spanish in-laws in Estepona and venta signs were up everywhere. The construction boom had come to an end and, coupled with the falling pound, those retirement homes for UK ex-pats and investment opportunities for the Spanish had become a burden. As a result, there are areas in Spain that resemble ghost towns with half-finished apartment blocks and empty shops.

So, as Spain gets hit and Greece’s ferry workers begin their strike on the first day of the tourist high-season, you would think that the “Club-Meds” would be supportive of each other, right?

Well, not quite. Unfortunately, although not surprisingly, there is a bit of the blame game happening here.

Spain has accused Italy of dragging its feet over public sector reform while Italy – presumably in homage to its wayward Manchester City son – has stuck its boot in, claiming that Spain is risking contagion by failing to pay enough attention to public finance reform.

So why should this matter? Surely the bailout funds would cater for this? And the new rules for banks would assist in this as well?


El gatito no tiene cualesquiera dinero if you pardon my Spanish, there is no money in the kitty.

Despite the trumpets of acclaim, the deal with Germany to ‘boost’ the bailout mechanism doesn’t amount to much more than a can of beans.

According to the Centre of European Policy Studies, the combined cumulative money that Spain and Italy would need is around €1,800bn. The European Stability Mechanism wouldn’t have enough money to pay even half the cash needed in financial assistance.

As for the banks, last week the European Central Bank released figures based on Basel III rules which showed that continental banks were €242bn short of the requirement with 27 out of 48 banks recorded tier 1 capital adequacy ratios of below the target seven percent of assets while 10 organisations had a core capital of less than 4.5 percent.

Now of course there are new stricter capital requirements coming in next year, but time and available funding is short. If time runs out, banks will go under and the ouroboros of restricted capital, restricted funding, restricted growth, leading to recession, is hurting the likes of Spain and Italy and could suck in the formerly considered safe powerhouse of the Netherlands.

All this is depressingly familiar and as usual, these countries cannot offset the demands required by reform as these reforms are demanded by the very thing that prevents the offsetting of pain – the euro.

At the top, I suggested Spain as the latest to give the euro a kicking but the reality is that the actual kicking is being done by the euro itself and the question has to be asked about how much permanent damage its studs will do to these countries before the whistle has to be blown for full-time as it sure as hell not being blown for persistent fouling.

Simon Miller is a Contributing Editor to The Commentator and the Editor of Financial Risks Today. He tweets @simontm71

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