The telephone rings at the desk of a top investment bank manager. He is asked why the Spanish risk premium is out of control and topping the 400 basis point level. His first response is what the S&P has emphasized: "Spain will be the only major European country to experience a recession in 2013."
His second response hits harder: "After Draghi's speech on Wednesday, Spain is left with little time to execute pending reforms, and the issue is that some of these reforms, such as those targeted at the financial sector, nobody knows where the money to execute the reforms will come from. Because the Deposit Guarantee Fund and the Banking Restructuring Fund are tied up in reserves."
Official sources consulted by elEconomista also acknowledge that time is running short. These sources assure that our country has until July to execute its last reform if it wants to avoid a bailout, something which nearly happened in 2010. This time span coincides with the time span the EU is giving Spain.
The situation is complex. Yesterday the Spanish risk premium soared to levels not seen since November 2011. Government officials looked dour and perplexed, suggesting that they did not expect that the risk premium was going to go up again.
At this point in time, Mariano Rajoy's government has already laid out the first part of a financial reform and finalized a hard nosed labor reform. It has also clearly indicated that the major focuses for government will be balancing the budget and setting a zero-deficit policy for regional governments.
But the market isn't a believer yet. It will wait to see if Spain's initiatives actually take shape before tensions decrease and the European Central Bank (ECB) starts buying debt again. This will be critical for slowing down the rising costs associated with issuing Spanish debt. European authorities are ready to put Spain on the rack, which they did with Italy this autumn, so that we execute all necessary reforms rapidly.
