Spain’s crisis tamed, but still biting

Spain seems to be finding its way out from trouble without rushing to the emergency exit. The steady premium risk scale down enables the government to avoid resorting to a rescue package for survival. For all its mild coverage, such a step would have signalled a flat acknowledgement of failure leading to a free fall in confidence. Such an achievement is undoubtedly linked to the overall feeling the Euro is now sailing on a firm course. Thus current Spanish differentials no longer embody the risk of a common currency implosion.

But are we witnessing a real improvement in Spain’s performance? Some key data point in the right direction. Relentless efforts to streamline public finances are paying off. Deficit will keep within the 7% boundary, only marginally higher than the committed goal. An impressive success, as no other country has ever reduced so much its public imbalance against the formidable odds of a steep recession.

The massive banking overhaul paves the way for redressing credit activity back to normal. It will take some time before margins recover to previous levels, but the financial gloom hitting this vital industry in the last year has already vanished. It still faces the danger of national regulatory overshooting, aimed at compensating past flaws. But this move will be effectively checked by the forthcoming EU common rule book and the transfer of supervisory powers to the European Central Bank. On top of that, delaying implementation of the tough Basel III liquidity requirements will grant banks a much needed breathing space to refurbish their mauled balance sheets.

External imbalance is hastily shrinking as exports burgeon while imports are dragged down by the decayed domestic demand. The foreign sector thrust has largely made up for the sluggish home performance. Yet, as consumption falls to fresh levels the production gap is likely to expand over the next months. Employment will bear the brunt of the huge real adjustment the Spanish economy is undergoing.

Thus, prospects point to a desperately slow recovery that might start at the close of the year. Up to then, substantial job losses and a further fall in domestic demand are to be expected. A most nasty scenario for the months to come. Should any external shock trouble the waters, Spain is bound to experience further difficulties. For all the promising evidence it is quelling its past disarray, it still faces a long journey before falling back to square one is to be discarded.