Spain’s triple blow: downgrade, unemployment figures and mortgage-default fears

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By:
Nathan Collins
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Rising unemployment – even from a high base – and growing mortgage default fears have added to market concerns over Spanish solvency.

Poor economic data released on Friday comes hot on the heels of Standard & Poor’s two-notch sovereign credit downgrade to BBB+, though markets had largely priced this in.

Data released on Friday states that unemployment in Spain is more than 24%, the highest in 18 years, and retail sales have dropped 3.7% year on year – the 21st straight month that such sales have declined. The timing is problematic for Spain’s May 3 auctions of three- and five-year debt, say markets players. “This puts more focus on next week’s bond auctions – while the market may have seen it coming, it certainly can’t help,” says Daniel Baker, head of FX and fixed income for Europe and emerging markets at Informa Global Markets. Against this backdrop, markets fears over Spanish mortgage delinquency rates have snowballed. However, Santander CEO Alfredo Saenz derided these fears at a news conference outside the bank’s headquarters: “Mortgages get paid in good times and in bad. Anyone raising this problem as one of the issues for the Spanish financial system is saying something stupid.” “[The downgrade] puts Spain into line with how it was being priced by the market,” says Marc Ostwald, strategist at Monument Securities. “The reaction has been surprisingly muted, but that’s because of all the liquidity that’s around at the moment. The liquidity – whether it’s from the ECB or wherever else – impairs the market’s reaction.” Baker fears Spain’s woes highlight how eurozone economies are stuck between a rock and a hard place: austerity and be damned. “No downgrade to a peripheral country comes as a surprise at this stage,” he says. “What is strange is the timing: we’re seeing austerity measures being implemented, but they’ve chosen to downgrade after that.”

“To an extent, Spain isn’t getting credit for what it’s done to put its house into order,” says Mark Miller, European economist at Capital Economics. "The government is trying to signal that it’s being serious, and this doesn’t help."