Focus shifts to Spaxit

The banking crisis could even mean that Spain beats Greece out the door.

Greece is so passé. This week, the eyes of the world have slowly begun to shift to Spain.

The real kick to switch focus was the news on Monday that the Spanish/German bond spread had topped 5 per cent - that is, the yield on Spanish bonds is now over five percentage points above the yield on German bonds. Why does this matter? Because spreads for Greek, Irish and Portugese bonds were over that level for 16 days, 24 days and 34 days respectively before they were forced into bailouts.

The root of Spain's problems are very different from Greece's, though. It's a combination of a terrible housing bust and the bind the euro traps them in. Once house prices started to plummet, the banking sector was in deep trouble, but due to the single currency, Spain can't recapitalise it the way a fully sovereign state would. So there is a very real risk of Spain going bankrupt and being forced out of the eurozone.

But this risk alone is surmountable. A combination of a sympathetic ECB (which, of course, means a sympathetic Germany), confidence in the ability of the institutions involved to find a solution, and speedy action would greatly reduce the danger of Spain leaving the currency (which has, inevitably, been dubbed a "Spaxit"). Unfortunately, none of those things actually exist.

Afraid of Spain leaving the eurozone, Spaniards are moving their euros out of their country's banks, and either hoarding notes or opening accounts in Northern Europe. Which means that the banks are in even more trouble, the bailout costs go up, and Germany is even less likely to help out. As Tyler Cowen put it:

Spain is in a self-cannibalizing downward spiral, as Greece was and is.  It will not end until there is, at the bottom, an absolute and total crash.

The Wall Street Journal's Matthew Lynn even thinks that the Spanish exit could happen without a Greek one, giving six reasons Spain will leave the euro first:

There are few good reasons for the country to stay in the euro — and little sign it has the will to endure the sacrifices the currency will demand of them.

What's more, as Matt Yglesias points out:

I don't think anyone has deluded themselves into the idea that the eurozone could survive Spain leaving. If Spain goes, it all goes.

Grexit may or may not increase the chance of Spaxit. But Spaxit almost certainly means Netherlexit, Fraxit, and even Gerxit. (Although hopefully those "words" will never again see print)

Ironically, this death spiral may now be the best hope for Spain. The knowledge that a failure to recapitalise its banks could lead to the end of the eurozone gives it much needed leverage over the ECB to gain the funds it needs. But, as the Telegraph's Ambrose Evans-Pritchard reported:

There is no sign so far that the ECB is ready to relent as Frankfurt and Madrid cross swords in an escalting test of will. The ECB has scotched Mr Rajoy’s tentative plans to recapitalize Bankia by drawing on ECB funds.

Perhaps put more vividly by the LSE's Luis Garicano:

It is dangerous to play chicken when you are driving a Seat and the ECB is driving a tank.

A rally for the Spanish People's Party. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Commons Confidential: Fearing the Wigan warrior

An electoral clash, select committee elections as speed dating, and Ed Miliband’s political convalescence.

Members of Labour’s disconsolate majority, sitting in tight knots in the tearoom as the MP with the best maths skills calculates who will survive and who will die, based on the latest bad poll, observe that Jeremy Corbyn has never been so loyal to the party leadership. The past 13 months, one told me, have been the Islington rebel’s longest spell without voting against Labour. The MP was contradicted by a colleague who argued that, in voting against Trident renewal, Corbyn had defied party policy. There is Labour chatter that an early general election would be a mercy killing if it put the party out of its misery and removed Corbyn next year. In 2020, it is judged, defeat will be inevitable.

The next London mayoral contest is scheduled for the same date as a 2020 election: 7 May. Sadiq Khan’s people whisper that when they mentioned the clash to ministers, they were assured it won’t happen. They are uncertain whether this indicates that the mayoral contest will be moved, or that there will be an early general election. Intriguing.

An unguarded retort from the peer Jim O’Neill seems to confirm that a dispute over the so-called Northern Powerhouse triggered his walkout from the Treasury last month. O’Neill, a fanboy of George Osborne and a former Goldman Sachs chief economist, gave no reason when he quit Theresa May’s government and resigned the Tory whip in the Lords. He joined the dots publicly when the Resolution Foundation’s director, Torsten Bell, queried the northern project. “Are you related to the PM?” shot back the Mancunian O’Neill. It’s the way he tells ’em.

Talk has quietened in Westminster Labour ranks of a formal challenge to Corbyn since this year’s attempt backfired, but the Tories fear Lisa Nandy, should the leader fall under a solar-powered ecotruck selling recycled organic knitwear.

The Wigan warrior is enjoying favourable reviews for her forensic examination of the troubled inquiry into historic child sex abuse. After Nandy put May on the spot, the Tory three-piece suit Alec Shelbrooke was overheard muttering: “I hope she never runs for leader.” Anna Soubry and Nicky Morgan, the Thelma and Louise of Tory opposition to Mayhem, were observed nodding in agreement.

Select committee elections are like speed dating. “Who are you?” inquired Labour’s Kevan Jones (Granite Central)of a stranger seeking his vote. She explained that she was Victoria Borwick, the Tory MP for Kensington, but that didn’t help. “This is the first time you’ve spoken to me,” Jones continued, “so the answer’s no.” The aloof Borwick lost, by the way.

Ed Miliband is joining Labour’s relaunched Tribune Group of MPs to continue his political convalescence. Next stop: the shadow cabinet?

Kevin Maguire is Associate Editor (Politics) on the Daily Mirror and author of our Commons Confidential column on the high politics and low life in Westminster. An award-winning journalist, he is in frequent demand on television and radio and co-authored a book on great parliamentary scandals. He was formerly Chief Reporter on the Guardian and Labour Correspondent on the Daily Telegraph.

This article first appeared in the 27 October 2016 issue of the New Statesman, American Rage