No signs of growth

The Bank of Spain's annual report, published on Wednesday, reiterates, time and again the need for the government to stay on course in reducing the budget deficit if the country is to avoid further bashing from the international money markets. The central bank is correct to do so, and its analysis essentially correct. It looks like it will be necessary to impose spending limits on the regions, keep reducing the deficit, apply new measures if the public accounts deficit appears to be getting out of control, and - if there is any need to increase fiscal revenue - to do so through stealth taxes.

The Bank of Spain even goes so far as to suggest reducing tax expenditures, but without pushing for tougher measures to avoid tax fraud. In short, the bank accepts the fiscal measures recommended by the European Union, and which the government has agreed to implement. However, it must be said that despite its wise words, the central bank has this time round tiptoed around some of the harsher aspects of Spain's current financial reality.

Few investors could surely doubt any longer that the government and Spain's financial institutions are sticking to the letter when it comes to reducing spending; neither should they forget that the pensions system has been overhauled (something the governor of the Bank of Spain welcomes, and congratulates the government for carrying out), and that slowly, but surely, the labor market is being reformed (albeit not at the pace nor with sufficient depth that the Bank of Spain would like), and that the financial system too is being undergoing change. And yet, despite its efforts and achievements, investors are showing no signs of reducing the premium they demand to hold Spanish bonds.

An optimist might look on the bright side and point out that at least the premium hasn't skyrocketed as that of other peripheral euro-zone nations has done. But the truth of the matter is, that if the Spanish economy is to start growing - which as far as the Bank of Spain is concerned means stabilizing the cost of debt, reducing financial expenditure, that Spanish banks are able to compete with their German rivals, and for consumers to recover confidence - then the risk premium has to come down.

Premium still high

The problem is that the premium is showing no sign of coming down, and it probably won't until Spain has sorted out the mess involved its savings banks, and while doubts remain about the likely impact of regional debt on the banking system (neither of the two main political parties have shown themselves able to shed any light on the matter), and while labor reform remains uncompleted. And all this with the threat of a new slowdown in economic growth, accompanied by signs that the second quarter will be bring equally glum news.