Tom McDonnell: As well as being World and European football champions Spain also currently holds the distinction of having the world record for number of sovereign defaults. Spain defaulted six times on its external debts in the period between 1557 and 1647 and a further seven times between 1809 and 1882. Thirteen in all.
Spain will clearly be the key battleground of the debt crisis. Already things do not look good and the bank recapitalisation process is now set to begin in earnest. The Spanish Government nationalised Bankia yesterday. This may well prove the first of a number of nationalisations. Veteran observers of the Irish bank bailout will watch with great trepidation as this story unfolds and the full scale of the losses in the Spanish banking sector become clear.
According to the European Commission Spain is unlikely to meet its deficit targets this year or the next while yields for Spanish 10 year bonds were 6.171% as of this morning, a level that is unsustainable over the long term. Arguably Spain is now insolvent and it could easily totter into a bad equilibrium whereby it is de facto locked out of private markets and requires rescuing by a bailout fund. Over at the FT Nouriel Roubini and Megan Greene are pessimistic. They argue that:
"The only way for there to be a happy ending in Spain is if action is taken swiftly in Brussels, Frankfurt and other European capitals. But that is not likely to happen. The eurozone periphery and Spanish crisis look like a slow-motion train wreck."
The bailout packages (EFSF, ESM) as designed are inherently fragile in nature and certainly not suitable for a country of Spain's size. Worsening figures in Spain and the threat of a fourteenth external default could be the catalyst for the ESM to get a banking licence. That would completely change the dynamic of the debt crisis.