As Spain began to roll out more restrictive measures on Monday to deal with the growing effects of the coronavirus, the economic fallout continued on its own expansion path.
The blue-chip index Ibex 35 gave up 7.96% on Monday, the biggest loss since the day after the Brexit referendum of June 24, 2016, when it lost 12.35%. While it was the fourth biggest drop in the Ibex 35’s entire history, similar scenarios were playing out in stock markets across the world, fueled by investor fears about Covid-19.
Simultaneously, the risk premium in southern European countries – particularly Greece and Italy but also Spain to some degree – rose in a way that is reminiscent of the worst years of the euro crisis, although this was not so much due to higher borrowing costs for Spain as to lower ones for Germany.
Financial experts have also warned about a global drop in demand and supply that could lead to job losses, starting with travel-reliant industries such as tourism, a major driver of the Spanish economy.
The coronavirus crisis was also having an unexpected effect on the Spanish labor market: in a country where spending a lot of face time at the workplace has long been considered the norm, companies have been suddenly scrambling to introduce telecommuting options after Health Ministry Salvador Illa on Monday recommended that people work from home if possible to avoid contagion.
The sudden plunge in oil prices proved to be the final ingredient in an explosive combination. “The price war between Saudi Arabia and Russia was completely unexpected. Without this factor, I think that [Monday] would have been a day of recovery for the stock markets,” said the financial analyst Juan Ignacio Crespo.
“With investors in panic mode, it is hard to see a change of heart in the short term,” agreed Javier Molina, the spokesman in Spain for the brokerage firm eToro.
The market volatility sent investors flocking once again to assets that are considered to be the safest, “chiefly German and US bonds,” noted Nuria Álvarez, an analyst at financial services company Renta 4 Banco. “The markets are putting themselves in the most negative scenario: a recession, or at the very least very strong negative consequences.”
While the yield on Spanish 10-year bonds remained stable at around 0.24%, the yield on the benchmark German bund dropped to -0.88%. This means that the difference between what investors demand to hold for Spanish rather than German bonds increased to more than 110 basis points for the first time since April 2019. This does not reflect higher borrowing costs for Spain, but even lower ones for Germany compared with last week.
Impact on tourism
Writing on the International Monetary Fund (IMF) blog, Gita Gopinath, economic counselor and director of the IMF’s Research Department noted that the coronavirus crisis was already having an effect on both supply and demand, and this could ultimately lead to job losses.
“On the demand side, the loss of income, fear of contagion, and heightened uncertainty will make people spend less,” she said. “Workers may be laid off, as firms are unable to pay their salaries. These effects can be particularly severe on some sectors such as tourism and hospitality – as seen for example in Italy.”
In Spain, which is equally reliant on tourism, the impact of coronavirus-related restrictions could be significant as the sector prepares for the Easter break, one of the peak moments of the season.
English version by Susana Urra.