Official? Or False?

The Portuguese request for financial assistance from the EU last week begs an important question: could Spain really be next?

To answer this we may look to any number of sources; however one place we should not expect to find a reliable prediction is the mouth of a public official.

You might remember some of these quotes from the past year:

“We need no bilateral loans. We haven’t asked for any and don’t need any” George Papandreou, Greek Prime Minister, January 2010.

"The state is well funded into June of next year, we have substantial reserves, so this country is not in a situation or position where it is required in any way to apply for the [European Financial Stability Facility]" Brian Lenihan, Irish Minister for Finance, November 2010.

"There are no links between Portugal and Ireland... I've heard a lot of talk of the IMF. The country does not have any need for aid." José Sócrates, Portuguese Prime Minister, November 2010.

‘risk of contagion is absolutely ruled out’ Elena Salgado, Spanish Minister of Economy and Finance, April 2011.

Why do public figures, who undoubtedly recognize the desperate financial situation their countries are facing, feel the need to make these exaggeratedly optimistic statements? Their assertions are essentially a desperate attempt to calm the onslaught of speculation against their nation’s financial credibility. They hope that their steady manner and unreserved, if false, resolution will calm the fears of investors and constrain the spread of their bond yields, thereby reducing their cost of borrowing.

Is it worth a shot? Sure. Does it work? Apparently not.

However, so far the threat of contagion for Spain really does appear to be limited. The government has been decisively tackling the deficit and taking measures to strengthen the banking industry and last Thursday €4.1bn of debt was successfully auctioned. The spread between Spanish and German borrowing costs has remained steady.

Perhaps this time we might believe the official stance...?

Post written by Stephen Devlin - 3rd year MA (Hons) Economics