If Spain Is The Model We Better Run For The Hills

Once upon a time most journalism was local.  It was easy then.  Journalists spoke the same language as their readers and, more importantly, their sources.  If and English paper wanted to publish a story about Spain, they would ask the Spanish correspondent to write one and translate it.

Then, a big globalizing cloud came in the horizon.  Established newspapers had to compete not only with each other but with independent free-lancers on the internet.  The Financial Times, allegedly a leading financial newspaper, recently published an article ( Italy should look to Spain for inspiration) suggesting that Italy should emulate Spain in their cost-cutting efforts.

We do not not whether the author, Mr. Tony Barber, has ever visited Spain or, at the very least, bothers to read the Spanish newspapers online.  As we have noted before, Spain's so-called cost-cutting efforts are based on such time-honored accounting gimmicks like deferring government payments until they can be moved into the next fiscal period or getting forced financing from the Pharmacies (link in Spanish).  Not to mention that the so-called Reestructuracion de Cajas Mr. Barber extols, has happened in name only as the critical phase of taking losses and raising enough capital to make them viable has yet to happen.

Mr. Barber, like many of his colleagues, seems to be guided by the Efficient Market Religion.  Thus, he offers the following as divine proof of the superiority of Spain's cost cutting efforts:

Now investors perceive Italy to be at greater risk than Spain (and Cyprus has leapfrogged them both). The spread between Italian and Spanish 10-year government bond yields stood on Thursday at about 51 basis points, or 0.51 percentage points.

 We may forgive Mr. Barber who, most probably, has never bought or sold a bond for believing that investors reflect their opinion in such impeccable manner.   The fact, however, is that the markets are far from clear with regards to their opinion of whether Italy or Spain is more likely to go bankrupt.  As an example, the credit of Intesa San Paolo (an Italian bank which will almost certainly fail if the Italian government were to fail) currently trades at a better rate than that of the Italian government, an anomaly that has persisted for years.

The fact is that both Italy and Spain are very sick countries.  Spain, by virtue of its complicated political structure, may look better to naive journalists who can't bother with Spanish sources to investigate were the bodies are buried.  However, with 20% unemployment, a financial system clogged with real estate loans marked at par (original value, i.e. without loss reserve), and lack of central control of the autonomias (regional governments), looks hardly as a model to emulate.