Spain Goes Irish On Regions
Slowly but surely, the Spanish authorities are gradually socializing the rest of the world to the dismal truth that we have been so vociferously arguing - that their debt levels (or more specifically their debt/GDP ratios) are significantly higher (explicitly) than their current official data suggest. Today's news, via the WSJ, that the Spanish government may take over some regions' finances, in an attempt to shore up investor confidence (just as Ireland did with its banks and we know how well that worked out?) is yet another step closer to the 'realization' that all that is "contingent" is actually "explicitly guaranteed." As we noted here, this leaves Spain's Debt/GDP nearer 135% than its 'official' 68.5%. The WSJ notes comments from a top government official that "there will soon be new tools to control regional spending" and that they may take over at least one of the country's cash-strapped regions this year. As we broke down extensively here, this is no surprise as yet another group of political elite find the truth harder to deal with than the blinkered optimism they face the media with every day and yet as PM Rajoy notes "Nobody can expect that deep-seated problems be solved in just a few weeks", the irony of the euphoria felt around the world at the optical rally in Spanish spreads for the first few months of the year is not lost as Spain heads back into the abyss ahead of pending auctions and what appears to be more ponzified guarantees of regional finances (as long as they promise to pay it back and have 'a plan'). The simple truth is, as acknowledged by Rajoy, Spain has lost the trust of financial markets.
It seems that CDS markets have been ahead of the reality in Spain's true credit situation as it is perhaps a little easier to manipulate a few bonds than an entire sovereign CDS market. The velocity of the most recent move suggests some short-term action by the politicians/ECB soon enough though their failed attempt today suggests the wholesale exit of real money is a hole too big for even the ECB to comfortably fill - and furthermore, as we have noted, every bond the ECB buys via SMP increases the default risk (or more clearly reduces recoveries) on existing bondholders and thus making a situation worse...
Chart: Bloomberg
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