February 10, 2013 4:18 pm

Spanish sentiment belies scandal and woe

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Madrid Protest

An anti-austerity protest in Madrid

Bond markets and bank analysts are warming to Spain again, despite the latest political scandal to engulf the government of Mariano Rajoy. The country’s debt is back in demand, shares have rallied and speculation over a sovereign bailout has subsided. Hardly a day goes by without a fresh assurance from Madrid that the Spanish economy is finally turning the corner.

In the small Catalan town of Arbúcies, however, that corner has just moved further out of sight. After a long struggle with its creditors, one of the biggest local employers declared bankruptcy last month. Founded in 1964, Noge was one of several companies in town that specialised in making bodywork for bus manufacturers. As many as 93 workers now risk losing their jobs.

Corporate bankruptcies in Spain

Corporate bankruptcies in Spain

“This is very serious, not just for Arbúcies, but for the whole region,” says Pere Garriga, the mayor. It is not just the fate of Noge that has him worried: in the last three months alone, the town has seen the closure of two restaurants, two bars and five shops. “I don’t see anything positive this year,” says Mr Garriga.

The mayor’s gloomy assessment is backed up by the latest batch of economic data, as well as by the International Monetary Fund, which predicts a deepening Spanish recession this year. But it also points to one of the most striking aspects of Spain’s economy today: the sharp contrast between brightening market sentiment and the worsening situation on the ground.

Since the height of the Spanish financial crisis in July last year, bond yields have fallen by more than 2 percentage points and the stock market has risen by more than a third. January was the best month for Spanish bond sales in six years, leading the government to boast that the country had finally “touched the bottom” of the crisis.

Yet, as Citibank economists wrote in a note on Thursday, the Spanish economy is in many ways in worse shape today than six months ago. House prices declined “at the fastest pace of contraction since the bubble burst, and overall sentiment . . . has failed to show the minor improvement seen in other peripheral Euro countries in recent months”, the bank said.

Signs of an economic turnround are indeed hard to spot. Take bankruptcies: in the last quarter of 2012, the latest for which data are available, the number of companies declared bankrupt soared by almost 40 per cent to 2,584. It was the highest number since the crisis began, suggesting that the situation for credit-starved Spanish companies is not only getting worse – but getting worse faster than before.

Gross domestic product declined by 0.7 per cent in the last quarter of 2012, the sharpest quarterly drop in more than three years. Nor has there been any sign of a turnround in Spain’s dismal unemployment numbers, which continue to rise towards 6m, or more than 26 per cent of the workforce.

Javier Díaz-Giménez, a professor of economics at IESE business school, says part of the apparent contrast can be explained by the unusually sharp fall in demand in the last quarter of 2012 – which in turn was prompted by a hike in sales taxes and the abolition of the extra December salary for public servants.

In the case of Spain, the rise in market sentiment appears at odds not only with backward-looking economic data, but also with most long-term forecasts. The IMF expects a drop in GDP of 1.5 per cent this year – a worse recession than in 2012. Citibank is even more pessimistic, suggesting output will decline by 2.2 per cent this year and 2 per cent in 2014. Goldman Sachs, too, is predicting another two years of recession in Spain.

Meanwhile, new risks are appearing: the slush fund scandal in the ruling Popular Party has already shown signs of denting investor confidence. Few believe the affair will bring down Mr Rajoy’s government. But there is growing concern that the affair will hamper his ability to push through budget consolidation and economic reforms.

That, in any case, is the fear voiced by analysts such as Luis Garicano, a professor at the London School of Economics. He argues that the recent improvement in investor sentiment reflects above all else the prospect of intervention by the European Central Bank, and cautions that confidence could disappear again quickly.

“The announcements by the ECB have bought Spain some breathing space to make changes and make its situation sustainable,” he says. “If Spain misses this change, which I am afraid is not impossible given the current corruption scandals, the bond market could again turn around on a dime against Spain.”

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