Now is not the time for doubts. Through giving official backing or public aid to the financial sector, Spanish government should put an end to any remaining uncertainty about banking sector reforms and cleaning up bank balance sheets, because the markets think that the process is not happening quickly enough.
As world events speed up, decisions are being made in slow motion. Yesterday Luis de Guindos insisted that the Cabinet and the Bank of Spain settle the regulations of a bad bank, but on principle, they won?t provide public aid to do so.
The Spanish government is forgetting the IMF's warning to avoid letting the cleanup burden fall on financial institutions, because this strategy could spread a contagion among healthy banks. In the meantime, the economic view grows darker daily, casting an extremely pessimistic shadow across Spain. The proof lies in the Ibex 35, which has fallen 2.55%. It has been the hardest hit stock market in Europe and has dropped to 2009 lows. Banks have registered losses greater than even Repsol and Red Eléctrica, which were negatively affected by expropriations in Argentina and Bolivia.
The risk premium has topped out at 424 basis points and, despite the bearish tone that?s dominating European stock markets due to weak manufacturing and employment figures, it remains clear that the gap between Spain and the rest of the EU is widening to dangerous lengths. The financial sector is assuming and will continue to assume the costs of this crisis, but the Spanish government now needs to take measures that stop the bleeding and slow down a vicious cycle that weakens the globe's trust in Spain.
