Decisive action needed for the pain in Spain

The Elephant in the European room has begun to move seriously. While people were distracted by the relatively small problems in Greece, Spain has continued down the path of poor economic development. It is probably a good time to start buying/averaging “up” on Spanish CDSs as the situation is slipping into further chaos. Reported debt to GDP ratios are closer to 90% , if you don’t use the creative accounting Spain has been reporting. The property sector will get hardly hit, starting this year, and of course this will create other negative effects such as “zombie” banks needing to start hitting the markets with even more properties and bringing forward those “zombie” loans. The sun will continue shining in Spain,  but majority of assets will enter the negative acceleration mode. Some more by El Pais.

It was the week that the Government detailed the draft budget of 2012 , a key further tightening of democracy, in order to regain “the confidence of investors and the European institutions”. But it has also been the worst week of the worst of Western financial markets so far this year, the Spanish stock market. And the opportunity for investors in debt again show its teeth. In short, the first time the markets show their distrust in Spain during the brief tenure of Mariano Rajoy, a bitter drink that already in 2011 the previous government socialist. A challenge Rajoy ponders how to respond.

Government sources say they will announce “new measures” in days, to be proposed “overwhelming” to cut a spiral that has moved it the risk premium (the difference with the performance of German government bonds) to 400 basis points, a level record in the fledgling legislature.

The Minister of Economy and Competitiveness, Luis de Guindos, gave on Friday in an interview with German newspaper Frankfurter Allgemeine, a hint of things to come: a “reform of public services, especially health and education”, new rules to hire and promote measures to “liberalize trade and professional services.” Full article here.

Self explanatory chart of the Spanish Debt/GDP ratio.

Chart courtesy Carmel Asset Management via Zero Hedge.