In many talk shows and in the press, we are hearing voices proclaiming the irrationality and delusion of the markets regarding the state of the Spanish economy. It is argued that the fact that Mr Market penalised Spanish bonds before the most austere budget in Spanish democratic history was made public, and continues to do so after the cuts, is irrefutable proof of the markets« madness. They say this is proof that this country’s economic policies must be set regardless of what the markets might think. That »the dictatorship of the markets’ is something we must ignore and fight against… But no. Let’s look at some of the reasons why we must not, and cannot, ignore Mr Market:
Firstly, Spain’s debt is so high that we are completely dependent on the next bond auction. We are teetering on the brink, and only a razor-thin and absolute rollover of our maturing debt can prevent Spain from defaulting as a country. It doesn’t matter what the interest rate is; the key thing is that we can pay when the debt falls due using new borrowed money. Because we are insolvent and there isn’t a penny to repay the debt, unless we keep piling on more and more debt. How long will this go on? Well, until Mr Market says ‘enough is enough’. In other words, until growing mistrust reaches a level high enough for foreign institutions to decide that lending money to Spain is no longer worth it, not even at that interest rate, which is also rising at an alarming rate. The process is the same as that followed by countries in a more advanced state of economic decay, such as Greece or Portugal.
Secondly, we have no capacity whatsoever to repay this enormous debt, as this would require a sustained surplus rather than a deficit. And we will never manage to generate the surplus needed to gradually deleverage without an expanding economy. It goes without saying (an interesting term) that what we have in Spain today is precisely the opposite – in other words, a massive economic recession.
Consequently, the stars are aligning in such a way that Spain is doomed to default or, at best, a bailout. Namely: a colossal and growing debt, coupled with an equally growing inability to repay it, and an economic recession exacerbated by imposed austerity, which closes the vicious circle. But let us not delude ourselves: these stars are our own, and we have aligned them with our own negligent hands. Could we improve our situation if, instead of imposing austerity, we stimulated the economy through quantitative easing and other monetary policy tools such as printing money? Possibly yes. But there is one small detail standing in our way: we cannot print our own money, and the country in the Eurozone that can do so (Germany) is not prepared to do so, at least for the time being. Therefore, we have no choice but to plunge headlong into this vicious circle.
The situation described above is what causes the markets – that is, foreign and domestic investors – to penalise Spanish bond yields. Mr Market did not approve of the runaway budget deficit and penalised our fundamentals and indicators with stock market falls and rises in the risk premium on Spanish debt. However, many believed that with restrictive budgets, which would substantially reduce the deficit, these penalties would turn into blessings for our economic policy. But they were wrong. Today, the markets are penalising us even more for the fact that such drastic cuts are driving our economy into recession and collapse. So how can we meet the expectations of the market and international investors, so that they stop penalising us and their money flows through our veins once more? The answer is simple, though it may surprise some: not at all. Mr Market penalises both strategies for the simple reason that both are bad. And someone must proclaim that nowhere, more than in the conscience of a generation born and raised in relative prosperity, is it written that there must be a solution to our problem. At least not a solution that does not involve a default or a bailout, both of which are always traumatic.
Neither madness, nor delusion, nor dictatorship. Mr Market essentially brings clarity when it comes to interpreting the harsh reality. And that clarity on the part of global investors as a whole is the most democratic thing the System has ever been able to create. The fact is that this democratic interpretation of the economy does not sit well with those who lack economic knowledge and who, moreover, come from countries facing greater difficulties – and even less so with their political class. But whether we like it or not, the objectivity and foresight of the markets put everyone in their rightful place over time, whether through actions they have taken or those they have democratically tolerated.
That’s right, welcome to the real world. A world in which the Spanish economy is on its last legs, and in which default could only be averted by a more or less covert bailout, involving large-scale measures such as those already being implemented through the LTROs towards the bankrupt Spanish bank. We find ourselves in a dead-end situation, in which Mr Market is increasingly sceptical about Spain’s ability to repay its debts. That mistrust, which translates into growing difficulties in refinancing our debt, is driving us into a recession that will prove fatal to what little creditworthiness we have left – if indeed we still have even a glimmer of credibility as debtors. And this worsening of our terminal illness means that the market is turning its back on us even more, as is only natural.
Faced with a seemingly dead end, and the free fall that preceded and followed the budget cuts, some politicians, bankers and investors are now tearing their hair out and crying out: What the h… do you want from Spain, Mr Market? But the answer is even more dramatic than the question, given that the markets, with a certain degree of indifference, are simply concerned with focusing on growing economies and the new emerging world, and keeping their distance so that Spain’s misery doesn’t splash over onto them. And anyone who criticises Mr Market for behaving in this way is simply crucifying the messenger for bringing bad news.