Spain, Italy and Portugal are in the midst of strict cutback programs designed to balance their public accounts as they also undergo significant legislative reforms to change their production models. But markets don't buy reforms, they buy results. Investors want substantive action and security to back their money.
This is the reason behind the stock market debacle this week. The Spanish stock market just had its worst string of trading days since November 2011, and the Ibex 35 is at 3-year lows. Blows in the stock market don't stand alone. After a period of relative calm, the Spanish Treasury issued timely approvals of 2012 debt sales, and interest rates on Spanish debt have shot up to 5.97%. The Spanish risk premium has rebounded past 400 basis points, also.
There is another debt issue next week, and all indicators suggest that it will pay high rates. So what can be done to help Spain regain confidence besides internal reforms for the short term even though people understand that the effects will not be visible until the mid- or long-term? The ECB is still the key, because it can breathe life into Spain's economy and take some of the pressure off country's that are trying to meet their reform obligations and other commitments.
Draghi stopped buying sovereign debt and decided to keep interest rates flat, which exacerbated the storm of troubles. Investors are struggling to trust so long as the ECB itself fails to show trust and re-initiate giving aid to struggling countries. For now, nobody can trust anybody else.
