Well, the article if far too pessimistic. No doubt Spain is in big trouble, facing a stubborn recession somewhat resembling that of Japan. As happened in Japan, the economy is unable to gain momentum due to a weak demand and poor corporate access to financing. Very bad prospects for Spaniards but, also for bond holders?
Not so; the Spanish Public Treasury will not default, as Japan's didn't, albeit for different reasons.
The main reason is that Spanish public debt is sustainable in the long term. It reached 68.50% of GDP in 2011, among the lowest in Europe, the fruit of years of public sector austerity which led to superavit till 2007. 10 and 5 year bonds are still being bought by the market, although at a high price. Today, 10Y bonds trade at 5,85%, high but still affordable.
In the long term, the Kingdom of Spain is solvent but, what if panic prevents markets from buying new debt? In my opinion, this is the main problem; it's not solvency but access to financing. And here enters the ECB: what we have seen in recent months is the european economic authorities commitment to avoid a default of Spain. The last invention was the LTRO (Long-Term Refinancing Operation), two years ago was to buy bonds in secondary markets (all convoluted but effective ways to circumvent the legal ban to buy any sovereigns in the primary market) As far as the Spanish government shows a firm resolution on reforms and austerity, the European Union leaders will not let she fall, since the default of Spain means the bust of the euro. During this crisis, the leaders of Germany and other strong economies failed to keep their citizens happy because the idea of virtuous states' money going to profligates was widespread (and I am not saying that Spain deserves being defined as profligate). But, if the whole framework is to fall, those electorates will understand the rescue; nobody believes that the breaking out of the euro is an option.
