Trouble in the Spanish CDS market

by on June 7, 2010 at 2:21 pm in Current Affairs, Data Source, Economics | Permalink

"Los inversores piden mayor prima por asegurar el riesgo de España a un año que a tres años."

In other words, Spain is riskier in the next year than it is three years from now, just like Greece and Portugal.  That means the market thinks things will be coming to a head.  Some very good pictures of the prices, and further commentary (in Spanish), is here.  The article also states:

En cualquier caso, este indicador significa que el mercado, ahora sí, nos sitúa en el mismo “subgrupo” que Grecia y Portugal.

I don't need to translate that one for you.

For the pointer I thank Abel.

1 Alex Tabarrok June 7, 2010 at 2:35 pm

Ay caramba!

2 E. Barandiaran June 7, 2010 at 3:25 pm

POBRE ESPAÑA: EN EL MISMO GRUPO QUE PORTUGAL Y GRECIA. Y SEGURAMENTE LOS TRES SE IRAN EN LA PRIMERA FASE DE LA COPA. MIENTRAS TANTO NOSOTROS LOS POBRES SUDACAS ESTAMOS BIEN. SI HASTA PENSAMOS QUE CHILE, BRASIL Y ARGENTINA GANARAN SUS GRUPOS EN LA COPA (DESPLAZANDO A ESPAÑA, PORTUGAL Y GRECIA RESPECTIVAMENTE).
FOOTNOTE FOR AMERICANS: “SUDACAS” ARE HOW WE LATIN AMERICANS ARE CALLED IN SPAIN.

Bill, sorry but again you are wrong. Spain’s fiscal crisis has been the result of a what happened with tax revenues and current spending in the past three years. Read this (sorry in Spanish)
http://www.fedeablogs.net/economia/?p=4535
The government has yet to fund the bailout of some Cajas (savings banks) and has yet to fund any support to commercial banks (they have benefited from how accounting rules are applied to hide losses).
I, however, suspect that the public sector deficit is much larger than reported in that reference. It’s very difficult to consolidate the accounts of Spain’s regional governments.
Since the government will have to fund the bailout of some Cajas and perhaps a few banks you’re right to point out that this may aggravate the fiscal crisis.
Now the interesting issue is what may happen with the Spanish government and how this may explain the perverse interest rate premia mentioned in Tyler’s post. Soon (perhaps before the end of 2010) there will an election and at this moment everything points to a large triumph by the opposition party (Partido Popular). The relevant question is what the government and the Socialist Party will do to prevent their defeat. You may remember that one advantage of democracy over dictatorship is a peaceful transfer of power –well, I think there are some people in Spain that do not expect such a peaceful transfer (it may be different from what happened on March 2004, but who knows how different). Spain’s future depends mainly on how the election works.

3 Bill June 7, 2010 at 4:52 pm

E. Barandiaran,

I am glad to hear that the Spanish government will not be in the business of bailing out its banks.

I have it on your word and reputation.

But, I am curious on your statement that the Spanish government has “yet” to bail out the banks: In your words: “The government has yet to fund the bailout of some Cajas (savings banks) and has yet to fund any support to commercial banks (they have benefited from how accounting rules are applied to hide losses).”

Might be wrong as to timing, but not as to what is really going to happen.

Want to bet?

4 The Money Demand Blog June 7, 2010 at 5:21 pm

The current level of Spanish CDS implies five year cumulative probability of default approximately equal to 20%.

5 E. Barandiaran June 7, 2010 at 5:53 pm

Bill, my understanding of Spain’s fiscal crisis is as follows:

1. According to the official data (see the ref. mentioned in my earlier comment), before the crisis there was a small surplus but it quickly turned into a large deficit mainly because of the collapse of housing markets and the construction industry but also because the government increased discretionary expenditures. I suspect, however, that the current deficit is larger than reported.

2. The government made the mistake of ignoring the large impact of the crisis on the budget and delayed any adjustment (for two years Zapatero argued that there was no need for a fiscal adjustment). Now the government has announced some measures to reduce the deficit. Even if the measures are implemented, most likely the reduction will be much smaller than announced. It will be very difficult to eliminate the deficit without a large adjustment program because some previous sources of tax revenue (mainly housing and the construction industry) will take a long time to recover their pre-crisis levels.

3. None of the above takes into account what has been happening with the Cajas and the commercial banks. Funds to bail out them are not budgetary funds but funds that are managed through Banco de España (the central bank whose post-Euro main responsibility is the regulation and supervision of financial institutions). So far the funds used to bail a few Cajas have not been significant. Yes, a much larger amount may be needed, but this will be handled separately from the budget. In Latin America we invented the concept of “quasi” fiscal deficit to account for all funds used by central banks in the 1980s to bail out financial institutions on behalf of government, but in Spain some of these funds will come from deposit insurance (in Latin America there were not funds from deposit insurance). Anyway, the politicization of Cajas (a sort of private banks closely related to regional governments) means that somehow budget funds will be used.

6 E. Barandiaran June 7, 2010 at 8:01 pm

Bill, my father’s ancestors were Basque and I lived in Bilbao most of 2008 and part of 2009. One of my daughters used to live and work in Madrid (six years) and I visited her often. I’ve toured most of Spain. Also, I’ve been studying the history of Spain and the Basque Country for my research on the welfare of nations. I agree with a well-known writer that said “Spain is not a country, at best it’s a soccer team.”

7 Michael Heller June 7, 2010 at 11:30 pm

Funny I was just thinking yesterday that in about 4 years might the right time to go and live in Spain. Euro savings won’t be worth much anywhere else.

Que bueno leer castillano aca! Este es un blog verdaderamente ‘americano’.

Tyler may not agree but I’ve just urged the FT to take steps to break the Keynesian consensus they helped establish in the last 2 years —

http://www.ft.com/cms/s/0/9927718c-726b-11df-9f82-00144feabdc0.html

I think Martin Wolf is now fighting a rearguard action —

http://video.ft.com/v/90345880001/Jun-7-Over-zealous-cuts-risk-UK-disaster-

8 sean June 8, 2010 at 9:32 am

how many languages does cowen speak?

9 http://www.nicecoachhandbags.com August 5, 2010 at 10:20 pm

Funny I was just thinking yesterday that in about 4 years might the right time to go and live in Spain. Euro savings won’t be worth much anywhere else.

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