The question is how is Spain going to open its books.
- Will it use the gold standard of providing asset level detail for the investment and loan portfolios of its banks so that investors can independently analyze the situation?
- Will it repeat the Irish government experience? This involved releasing selective data that makes the situation look better than it is and thereby destroys the government's credibility in the future if the situation turns out to be worse than represented.
The Wall Street Journal reported on Saturday, December 18, 2010, that:
Facing growing pressure from the financial markets, Spanish authorities promised to open the books of two groups of borrowers whose needs for cash are unnerving skittish investors.
Officials pledged to give investors an early peek into the finances of cash-strapped regional governments. Meanwhile, the country's central bank is speeding up plans to force regional savings banks to provide more information on their loans and the amounts they need to borrow. It hopes to quell rising investor fears that the banks might be facing a cash crunch or hiding real-estate losses.
Investors this week drove up Spain's cost of borrowing amid concerns that it could be the next country to need a bailout following Greece and Ireland, and possibly Portugal. In particular, they have worried that Spanish regions, which have a high degree of political autonomy, could derail the country's efforts to slash its budget deficit.
To address those fears, on Monday Spain will make public the finances of the country's regional governments for the first nine months of the year. It had planned to release those figures next year.
This week, Moody's Investors Service warned it might lower Spain's debt rating because of the country's relatively high refinancing needs next year and the possibility that it might have to inject fresh capital into its banks.
..."Ireland's sovereign creditworthiness has suffered from the repeated crystallization of bank-related contingent liabilities on the government's balance sheet," said Dietmar Hornung, vice president, senior credit officer at Moody's.
Spain insists that it isn't in the same situation as Ireland or Greece. It is betting that investors will come around to its view once they can see the inner workings of its banks and regional governments.
In some ways, Spain is an unlikely candidate for a bailout: Its government doesn't have much debt. Even after a generous stimulus plan and an economic slump that blew a big hole in its accounts, Spain's central government debt represented just 46% of its economic output at the end of last year. That compares with 65% for Ireland, 109% for Italy and 138% for Greece.
But Spain's government debt is just the tip of the iceberg. The country's regions, banks, businesses and households also borrowed heavily during the boom years—and history suggests the government could end up shouldering those debts too.
"Spain's problem isn't public debt—it's private debt," says Emilio Ontiveros, a private Spanish economist.
Another problem: Many of those Spanish borrowers will be refinancing their debts next year, at a time when investors are nervous about taking on any European risk. According to Moody's, Spain's central government must raise about €170 billion ($225 billion) in 2011, on top of €30 billion by the country's regional governments.
Spanish banks, whose own ability to raise funds is closely linked to the fortunes of the Spanish government, must refinance about €90 billion of debt next year, it added. The government has also set up a special facility for banks to draw on if needed, with a lending capacity of up to €99 billion. That fund will likely have to issue more government-backed bonds next year.
Some investors worry that so many Spanish borrowers will crowd each other out of the market in ways that could hurt the government's ability to finance itself at reasonable rates. That, they say, raises the chance that Spain will have to turn to the European Union or International Monetary Fund for a bailout.
"We have a sword of Damocles hanging over our heads," said Juan José Toribio, an economist and former IMF official now at the IESE Business School.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.