Financial markets offer no respite to Spain despite further budget measures

Traders on Tuesday ignored the government’s latest efforts to convince the investment community that it can meet its ambitious budget deficit target for this year in a shrinking economy as Spain’s risk premium widened and stock prices fell.

 The spread between the yield on the benchmark 10-year government bond and the German equivalent rose by 31 basis points to 433 basis points, while the blue-chip Ibex 35 dropped 2.96 percent to a new low for the year of 7,433.60 points just a day after Prime Minister Mariano Rajoy announced plans to shave 10 billion euros of outlays on education and health. The rest of the European bourses were also sharply lower, with the DAX in Frankfurt down 2.49 percent and the CAC 40 in Paris off 3.08 percent.

“The improvised announcement yesterday \[Monday\] on the part of the Spanish government has had zero impact on the Spanish stock market,” Reuters quoted IG Markets strategist Daniel Pingarrón as saying.

European markets were closed on Friday and Monday for the Easter holiday. Dealers said investors were also unsettled by weak US employment data released on Friday.

The debt problem hasn’t gone away despite the liquidity support from the European Central Bank.

Spain’s risk premium hit a euro-era record of 500 basis points in November but eased after massive injections of long-term liquidity by the European Central Bank which banks used to buy government debt. The balsamic effect of the ECB’s intervention has now evidently evaporated.

“We have a renewed concern in the euro region as the debt problem hasn’t gone away despite the liquidity support from the European Central Bank,” Bloomberg quoted Vincent Chaigneau, the global head of interest-rate strategy at Société Générale as saying. “The poor non-farm payroll data out of the US only exacerbated” investors’ aversion to risk, he added.

Economy Minister Luis de Guindos insisted Spain did not “need a bailout at the moment,” pointing to the fact the Treasury has covered about 50 percent of its needs for the year. In similar terms, the governor of the Bank of Spain, Miguel Ángel Fernández Ordóñez, ruled out the need for a rescue package, a move which he underscored had in “no way” been discussed within the ECB.

“Of course, the government is worried that the risk premium is above 400 basis points and is working relatively quickly to bring the situation back to normal,” De Guindos said.

De Guindos said it was best to ignore short-term developments in the financial markets. “What \[the government\] needs to do is implement the reforms, \[and\] complete its fiscal correction.”

In the face of calls by the European Union for Spain to speed up the overhaul of its financial sector, De Guindos insisted that the process was being carried out “rapidly” and that the sector would end up with “fewer, but stronger and better-managed lenders.”

Fernández Ordóñez also pointed to the drastic reform of rules governing the labor market imposed by the Rajoy government as a development that “could be very favorable for growth” in the economy.

The spending cuts announced by Rajoy in education and healthcare come in the wake of the government’s draft 2012 state budget, which calls for savings of 27 billion euros to cut the deficit from 8.5 percent of GDP last year to 5.3 percent in a year in which the economy is forecast to contract 1.7 percent.

European Commission spokesman Oliver Bailly told a news conference in Brussels that the latest measures announced by the Rajoy administration showed the government’s determination to restore its finances to health and meet its deficit targets.

Bailly said the draft budget along with the labor reform were steps in the right direction but insisted Brussels needed more information on the state of the regions’ finances, the main reason for the blowout in last year’s initial deficit target of 6 percent of GDP.