Problems Ahead Rain on Spain 'May Day' Parade


Many parades have been rained upon in the past few days in Madrid. Literally and metaphorically.

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May Day protests by labor unions were supposed to convey the strength of feeling on the part of the "hombre" on the street to austerity and labor reform.

But on a soaking wet afternoon in Madrid's Puerta del Sol, roughly 15,000 people failed to fill the square to capacity.

Sure there were impassioned speeches, but everyone left very promptly at 2 pm and by 2.15 pm the "Compro Oro" agents, street entertainers and tourists were back. Anti-austerity parade duly rained upon.

And so to the government.

Last week's jobless figures showed almost 25 percent unemployment, half of young adults are out of work and retail sales dropped for the 21st consecutive month. Then S&P downgraded Spain to BBB+.

Monday brought confirmation that Spain is in recession with a 0.3 percent contraction in gross domestic product. And S&P followed its downgrade of the sovereign with negative actions on all the major Spanish banks.

Spain's leader Mariano Rajoy, however, remains defiant. Monday's headlines screamed absolute commitment to austerity for the full duration of his government.

But it's the potential problems still to come that threaten to rain on everyone's parades through the summer.

Spain's decade-long property bubble is well and truly over, but many believe property prices have a long way to drop still. Banks have consolidated to some extent and boosted capital buffers with losses related to property developers in mind.

However the default rate on residential mortgages is just 3 percent. In the context of 25 percent unemployment this looks low.

The Centre for European Policy Studies estimates a 380 billion euro ($502.5 million) property and construction overhang.

Looks like the mooted idea of a bad bank (albeit one that no Spanish official is willing to call a bad bank) could be a good one.

Whats more, the ECB's 1 trillion euro 3-year LTRO helped bring down Spanish yields.

Indeed we've seen Spanish holdings of sovereign debt rise by almost 30 billion euros in the past month, taking up the slack as foreign investors have taken fright. But this effect won't last forever.

No one appears to be having a great time in Madrid, except me.

Reporting from the Bolsa on Monday, an elderly Spanish gentleman, hearing me speaking English, came over to congratulate me on our Queen's upcoming Diamond Jubilee.

She's so wonderfully intelligent and "guapa," he beamed. Congratulations. A ray of sunshine on a otherwise overcast visit.