“Everything Has Come to a Standstill”: Political Fallout Hits Business in Spain

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Things are likely to get a whole lot uglier.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

On Friday, Spain’s benchmark stock index, the Ibex 35, plumbed depths it had not seen since the worst days of 2013, the year that the country’s economy began its “miraculous” recovery. Of the 35 companies listed on the index, 15 (or 40%) are – to quote El Economista – “against the ropes,” having lost over a third of their stock value in the last 9 months. Only one of the 35 companies — the technology firm Indra — is still green for 2016.

This doesn’t make Spain much different from other countries right now, what with financial markets sinking in synchronized fashion all over the world. What does make Spain different is that it has no elected government to try to navigate the country though these testing times, or at least take the blame for the pain.

Inevitable comparisons have been drawn with Belgium, which between 2011 and 2012 endured 541 days of government-free living. However, Spain is not Belgium: its democratic system of governance is younger, less firmly rooted, and more fragile, and its civil service is more politically compromised.

To make matters worse, Spain’s richest region, Catalonia, which accounts for 20% of the country’s economy, bucked expectations last week by cobbling together a last-minute coalition government that seems intent on declaring independence within the next 15 months.

Meanwhile, business confidence, the cornerstone of any economic recovery, is beginning to crumble. Spain’s leading index of business confidence, ICEA, just registered a drop of 1.3%, breaking a straight eleven-quarter run of positive results. For the first time in almost three years more business leaders are pessimistic than optimistic about the economy’s outlook.

This should come as little surprise in a country where unemployment is still firmly on the wrong side of the 20% mark, over a quarter of the new jobs created last year had a contract lasting less than one week, and public debt is higher than it’s ever been [read: Six Nagging Facts About Spain’s “Recovery”].

And now that there’s no elected government in office, businesses that depend on public sector contracts, including the country’s heavily indebted construction and infrastructure giants, face weeks or perhaps even months of inertia.

“Everything has come to a standstill,” a contact in a Madrid-based research consultancy told me. “No decisions are being made, no funds are being released. It’s a vacuum.”



For the moment, the political backdrop has had limited impact on the price of Spanish government debt. The 10-year yield is at 1.75%, below the 10-year US Treasury yield, though it’s up a smidgen since the general elections on December 20. In its latest update, S&P left Spain’s rating unchanged, predicting 2.7% growth for 2016, despite the prevailing mood of political and economic uncertainty. In a similar vein, Deutsche Bank has forecast growth of 2.5%, regardless of what happens within or beyond Spanish borders.

In other words, every effort will be made to safeguard the economic order in Spain, including putting a ridiculously positive spin on a desperate situation. To paraphrase Europe’s chief financial alchemist, Mario Draghi: do not underestimate the amount of political capital that has been invested in the European project, in particular in the Eurozone’s fourth largest economy.

However, the leader of Spain’s Socialist Party (PSOE), Pedro Sanchez, doesn’t seem to have got the memo. A week ago he was in Lisbon to meet Antonio Costa, Portugal’s new prime minister, to seek advice on how to cobble together a broad coalition of left-leaning parties.

On Friday Costa, now in his second month of governance, announced a raft of economic reforms including a 5% rise in the minimum salary, reintroduction of the 35-hour working week for public sector workers and the cancellation of bank charges, one of the main profit sources in Portugal’s struggling financial sector – hardly the sort of measures that will endear Costa’s government to European institutions, especially given that Portugal boasts the second highest debt to GDP ratio in the world.

However, it’s one thing for an economy the size of Portugal to fall into the hands of political forces determined to reverse many of the economic reforms imposed by the Troika; it’s quite another when elected representatives of the eurozone’s fourth largest economy think of doing the same, especially during a year that Spain is expected to execute its biggest public spending cutbacks since 2010, when the Zapatero government froze public pensions, paralyzed public investment and cut public sector salaries by 5%.

Enter stage right the president of the European Commission, Jean Claude Juncker, who on Friday warned that he expects the formation of a “stable” government in Spain “as quickly as possible,” while emphasizing that he has no intention of interfering in the “exact composition” of that government.

Hardly comforting words given the Commission’s infamous role in the replacement, in 2011, of the elected governments of both Greece and Italy with technocratic regimes. Could history be about to repeat itself, or at least rhyme? The Commission already has enough problems on its hands – refugee crisis, stagnating economies, Brexit, Dutch referendum, an increasingly recalcitrant Italy and uncooperative governments in Poland and Hungary….

Given how much is at stake in Spain, things are likely to get a whole lot uglier before they get any prettier. Rajoy’s acting government has already accused Sánchez of seeking to break up the country by forging an alliance with Catalonia’s two main separatist parties.

A few days ago the Fiscal and Economic Crime Unit of Spain’s Policia Nacional announced it had launched an investigation into the finances of Podemos amidst allegations that it had received millions of euros of funding from the Chavez government in Venezuela and Iranian media. Serious allegations indeed, especially given Podemos’ leader Pablo Iglesias’ cozy ties with both.

As political tensions escalate, the chances of establishing even a weak interim government grow slimmer by the day. All indications point to new elections some time in the spring, meaning that the country will remain ungovernable for at least three or four months to come. In normal conditions this might not be much of a problem, but with the global economy edging closer and closer toward yet another fateful date with reality, Spain could well be on the cusp of a perfect storm. By Don Quijones, Raging Bull-Shit.

A Lethal Cocktail is coming together. Read…   Emerging Market Meltdown Sinks Spain’s Biggest Companies



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  18 comments for ““Everything Has Come to a Standstill”: Political Fallout Hits Business in Spain

  1. bill h
    January 16, 2016 at 1:03 pm

    Nature uses fire to regulate both plant and animal life. This fictitious world economy is the same. For too long, we have tried like back burning and DC 10 firefighting planes to put out a blaze that is slowly consuming the world. We need to allow the process of consumption to occur, and the green shoots will finally appear.

    • OutLookingIn
      January 16, 2016 at 4:32 pm

      Aha! Those infamous Bernanke “green shoots” from 2009!
      What happened to those?
      Just a reset won’t do. Requires a complete global restructuring.
      Without an honest, equitable and realistic new global financial system, any attempt at maintaining the status quo will fail.

      • John Doyle
        January 17, 2016 at 10:14 pm

        That will require a crash which instills great fear into the PTB. Then the elected reps might decide they should govern for the people and not the PTB. But such ain’t gonna happen without a big fright.

  2. Yoshua
    January 16, 2016 at 2:16 pm

    Europe is in deep political and economic crisis, but everyone here is in deep trance… we could care less.

  3. Christoph Weise
    January 16, 2016 at 3:59 pm

    The EU propaganda machine made every effort to portray strong economic improvements in Spain and Portugal but the only “evidence” presented were unnaturally low refinancing cost and a reasonable performance of the stock indices. It has been clear all through the last months that the propaganda was not justified by the developments in the main street world of business. Time for propaganda has now expired.

  4. Keith
    January 16, 2016 at 4:10 pm

    It became obvious in 2008 that current economic thinking was fundamentally flawed.

    When national economies are more separate, the elites of one nation can be following one set of half-baked ideas and another nation a different set.

    When the inevitable crash happens, hopefully you can trade your way out of trouble dealing with another nation that is doing well.

    When there is one school of economics that has supplanted all the others due to its consistent and accurate forecasts, which has enabled a national economy to be run smoothly without constant booms and busts for a considerable length of time, we will be ready for a global economy.

    Until then, it is better if every nation follows their own set of half-baked economic ideas and when they go wrong, hopefully another nation will be doing well, so that they can trade with them to get out of the current mess.

    • John Doyle
      January 17, 2016 at 10:18 pm

      There is one school of economic reason which describes how the economy really works. Modern Monetary [or money] Theory. It’s not new but the mainstream economists don’t like it as it upsets their idea that people behave rationally. And we all know how untrue that is. Just look at the GOP.

  5. Smitth
    January 16, 2016 at 4:31 pm

    Blue Horseshoe likes ABENGOA

    Jamie Gorelick certified

  6. Nick kelly
    January 16, 2016 at 4:53 pm

    Here’s another difference between Belgium and Spain- Belgium didn’t have a civil war in the 1930’s.
    (Formerly known as the Communist insurgency, a unanimous vote of the Spanish parliament re-named it the Civil War)

    • Xabier
      January 17, 2016 at 5:07 am

      It was a ‘Nationalist Insurgency’ by the way, a rebellion of conservative and fascist forces against an elected reforming, but not Communist government.

  7. MC
    January 16, 2016 at 4:58 pm

    At the same time that Podemos was being investigated for these funding irregularities, a very robust attempt is being made to attempt to discredit Italy’s M5S because of (still unproven) connections of a single party member with organized crime. Truly an incredible coincidence.

    It’s beyond doubt parties that do not follow the EU line to the letter, be them left-leaning (Podemos) or right-leaning (Front Nationale) won’t be allowed to gain the most minute speck of power. Short of downright outlawing them (something I suspect Spain could do, given the precedents), every single dirt trick in the book is being employed.
    It’s a measure of growing desperation, as the supply of useful idiots and clients to stuff the ballot box as Juncker and his clique expect is drying dry.
    Very much like Soviet resistance started to stiffen and become more formidable out of sheer desperation the closer Hitler’s armies got to Moscow, the more the EU (a catchall term which includes unaccountable for bureaucrats, lobbyists, financiers and Quisling governments) gets closer to the complete control it craves the more formidable the resistance it faces.
    The EU is committing exactly the same mistake Mohammed Reza Pahlavi did: it’s closing the relief valve of elections. No matter how you vote, you get a Rajoy, a Renzi, a Tsipras (who can play the victim as much as he wants but hasn’t fooled me for a second) or another little puppet obediently dancing on strings.
    As JFK rightly warned, “those who make peaceful revolution impossible will make violent revolution inevitable”. I am not one of those stockpiling ammo and canned food in prevision of a reharsal of the Bolshevik Revolution but the political climate is as worrisome as it has never been in my lifetime.

    • John Doyle
      January 17, 2016 at 10:26 pm

      The Euro experiment is structurally designed to fail. It was set up by neo-liberal voices and given restricted powers which made a mockery of the losses inflicted on member states by their loss of monetary sovereignty.
      The central authority in the EU cannot create money as MS nations can. They cannot use funds to bail out defaulting economies. MS nations can devalue and thus regain competitiveness. EU nations cannot. The stresses this creates will destroy the Eurozone currency union. It can then all be sheeted home to where it belongs, the Troika!

  8. margsview
    January 16, 2016 at 7:41 pm

    Its not just the EU attempts at artificially controlling Spain, Italy or Poland, its the power group behind the EU, and there we find the banks who were the main instigator and benefit of the bank bailouts —all set and executed by the EU…We as nation states have had more than enough—finding out that every government we’ve elected no longer works for us but for the banks and corporations,only. That is why our governments quietly inserted bailout and bail-in provision in each and every budget….

    If any group or population tries to be independent and revert to the long reliable democratic form of operating –corporations with banks have co-opted every government to allow corporations to dictate total overrule on any laws, regulations, thus making our Constitutions feeble to the point of irrelevant to enforce….We are about to be co-opted and dictated to by banks and work to fund 100% all banks…See bilaterals.org

  9. jan frank
    January 17, 2016 at 2:19 am

    Well, I live in Spain and earn a living there. Quite comfortable, thank you. My impression (which is backed by the Spanish union of tax inspectors) is that about 30% of the Spanish economy is “grey” or “black”; the only real impact of a “strong” central Spanish government is that it throttles any genuine enterprise. A strong central government builds airports that have never been used and toll roads that are used by fewer vehicles than provincial back roads, to give but two examples.
    At times it seems as if the Spanish bureaucracy, using laws enacted by this or that strong government, is determined to kill off any and all entrepreneurial activity. These laws are supposed to be enacted “in order to protect the public” but in fact most of these laws seem to be enacted “to protect the friends and colleagues of the politicians” running the strong central government.
    I think that a little less “strong central government” would perhaps allow ordinary people in Spain to get the economy rolling once more, even if it means depending on the “black” economy.

    • Xabier
      January 17, 2016 at 5:15 am

      Not quite right, you fail somewhat to understand the country you are working in: much of the spectacularly useless construction mega-projects pre-2008 were a product of the de-centralised and very corrupt autonomous regional system, not central govt., and were used to distribute funds through the party patronage network, Left or Right.

      You are however quite correct about the employment legislation etc, stiffling private enterprise; but have you not noticed, Spaniards are half-African in their ways and not at all enterprising – everyone wants a sinecure. Hence the popularity of being a ‘funcionario’ in un-sackable employment (the dream of all my relations!)

      • jan frank
        January 18, 2016 at 12:14 am

        Well, being a guiri, perhaps I do not understand all of it (but does anybody?). Strictly speaking you are correct, but as I understand it, politicians in regional governments got their lunch hooks on large wads of money from politicians in the central government in return for supporting that those politicians (Catalunya being a prime example). The regional politicians got the shine of having initiated impressive (and often useless) projects, and the national politicians got the political support they needed. So yes, it was “autonomous” regional governments that initiated the useless projects, but they wouldn’t have been able to do so without the half-hidden support of the “strong central government”.
        As regards the “funcionarios”, yes it is nice to have a secure job 8 to 2 only with occasional time off for snacks, but that still leaves the other 80% of the population needing to scratch around and make a living. And again, the sand poured in the works by those funcionarios comes from the sand pits that belong to a “strong central government”.

  10. JOSÉ lUIS
    January 21, 2016 at 7:45 am

    However, I try to remain positive.
    I am sure that things have to go bad, even very bad, to get going right.
    Mathematically it is called the “sigmoid curve” theory.
    In the meantime, cross you fingers and have a gin- tonic.

  11. Smitty
    January 22, 2016 at 6:18 pm

    They got into bed with Abengoa and Jamie Gorelick, for those that don’t know she was head of Fannie Mae, they deserve everything coming their way.

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