Spain’s bonds sell well, but regional problems loom

BRUSSELS, Belgium – Spain’s successful sale Thursday of 6.6 billion euros in bonds – more than expected, and at a better price – was a rare piece of good news for the euro zone, suggesting the markets had shrugged off the country’s downgrade by Standards & Poor last week.

Since the newly elected conservative Prime Minister Mariano Rajoy took office on December 21, the markets seem to have taken Spain out of their cross hairs. Yields the country pays on 10-year bonds fell to 5.4 percent on Thursday, down from a dangerous high of 7 percent in November. The stock exchange soared in response.

Not that Rajoy has any illusions about the task ahead. Unemployment — at 23 percent — is the EU’s highest. In the birthplace of the indignados protest movement, almost half the young people are out of work. The economy is moribund and set to shrink over the next two years.

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Analysts say Thursday’s success is due more to the European Central Bank’s (ECB) three-year cheap loan offer to European banking sector than confidence in a turnaround for Spain’s economy.

“It’s clear that the ECB’s extraordinary liquidity measures are easing the credit crunch that had spread across Europe, and they’ve opened up a indirect financing path for peripheral states which has really calmed the markets,” Nicolas Lopez, market analyst at M&G Valores, told the business daily El Economista.

Rajoy has another pressing problem: reigning in the debt of Spain’s 17 regions, whose governments enjoy broad financial autonomy under the country’s decentralized constitution.

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The central government blames the regions for the overshoot of Spain’s 2011 deficit which totaled 8 percent of gross domestic product, instead of the expected 6 percent. Rajoy says spending by the regions added about 15 billion euros to the national budget shortfall, and he is demanding belt-tightening.

Opposition is strong in regions which are fiercely protective of their autonomy. Thousands of public sector workers took to the streets in Barcelona on Wednesday to protest cuts put forward by the Catalonia regional government under pressure from Madrid.

Basque Country regional president Patxi Lopez, a socialist, rejected a proposal by the finance minister to pursue legal action against spendthrift regional politicians, calling the plan "absurd."

“All across Europe, this pursuit of deficit control as a sole objective is forcing countries into recession and economic slowdown,” Lopez told Basque television. “Governments need resources to invest so they can boost the economy and generate employment.”

However much he may want them to cutback as Rajoy is being forced to skirt Spanish law in order to provide central government financial support to keep debt-ridden regions afloat because they are finding it increasingly difficult to raise funds on the markets.