The financial and fiscal crisis in Spain entered a new and dangerous phase this week, as economic, political, civic and diplomatic links appeared to quickly disintegrate in the face of panic-stricken markets.
Investors in the country's debt and equity markets eagerly separated themselves from their holdings Tuesday, taking part in a massive sell-off that caused the price of various debt instruments to momentarily decouple from underlying economic fundamentals.
But the real breakdown came in the political sphere.
As Spain's most-indebted municipal government announced it would default on its debts and require a bailout, the pugilistic Spanish media accused national politicians of divorcing themselves from reality. Meanwhile, Spanish citizens are increasingly disengaging from observing the rule of law, lawmakers in the ruling party are disassociating themselves from each other, and political leaders abroad are reportedly backing off from offering help or standing in solidarity with the latest drowning man of Europe.
First, there's the market turmoil. On Tuesday, the benchmark IBEX 35 Index of Spanish stocks fell 3.58 percent to 5,956.30 points, below the psychologically important 6,000 level last seen during the recession of the early 2000s. The consensus among analysts: The sell-off was a dread-fueled stampede to the prospect that Europe's men in black, as the supranational technocrats of the European Union are colloquially referred to, would not be there to catch Spain in its latest fall.
Spain is trapped. ... The situation is very grave, and all worries are not enough, José Luis Cárpatos, a market analyst in Madrid, wrote in his daily after-the-bell note.
Today in the euro zone, every step is complicated, cumbersome, exhausting, The markets have thrown in the towel and are violently attacking the euro [...] and periphery debt, with strong sell-offs in Spain, Cárpatos added. In truth, no one knows what is going to happen: Everything is chaotic, and we would be surprised if anyone still has faith in the men in black, even when it is obvious that while Spanish governance is chaotic, the euro zone's is as well. Perhaps it's time to send in the aliens to oversee the men in black.
However, the carnage in stocks paled in comparison to the drop in the debt markets, where the rush out the door was so severe that it caused bond prices to temporarily disregard economic fundamentals, resulting in an inverted yield curve where short-term five-year bonds were paying higher yield than benchmark 10-year obligaciones. The cost of insuring government debt also skyrocketed, to a record-high 637 basis points. The rise in the cost of insurance for Spanish debt has been so extreme in the past two weeks -- up 16.5 percent since July 13 -- that the tight price relationship between the insurance and the underlying bonds, commonly known as the CDS-cash bond spread, has broken down.
Those market breakdowns, alas, are nothing compared to the explosive social situation in Spain, which, with the official unemployment rate more than 24 percent, was already a political powder keg before the markets started expressing their discontent.
The crackup of civility has occurred at a breakneck pace. On July 11, as Prime Minister Mariano Rajoy was announcing new austerity measures that would cut aid to many unemployed, Andrea Fabra Fernández, an MP of the ruling Partido Popular, was caught by TV cameras vociferously showing her support by yelling, ¡Que se jodan! -- literally Screw them! -- in response.
The expression crystallized public anger against the government, with violent riots rocking major urban centers since then, public employees walking out of government offices in defiance, and international broadcaster Al-Jazeera declaring that Spain is becoming ungovernable.
On Tuesday, the country's problems became even more unwieldy as Catalonia, the most indebted Spanish municipality that is home to second-largest city Barcelona, declared it would need a government bailout to handle its €42 billion ($51 billion) debt load. As soon as the news broke, the government turned to squabbling with the local media, which has an icy relationship with the current administration, insisting the latest bailout request was not a rescue and that any suggestion to the contrary was part of a media plot to discredit the Generalitat de Cataluña [Catalonian government] and the government of Spain.
For its part, the press did not back down, with every single major newspaper in the country across a vast spectrum of political leanings calling the latest development a rescue. El País, the country's newspaper of record, was unapologetic in its coverage of the latest crisis development, writing on its top story Tuesday that the spokesperson for the Catalonian government resorted to all type of ambiguous statements and round-about figures of speech when asked if the latest action was a rescue.
No one is fooling themselves as to where this all could end, and news reports also leaked out Tuesday that the Spanish prime minister had quietly approved the rehabilitation of a bunker room within the national Palacio de Moncloa to keep and secure the proper function of the National Center for Crisis Situations, including ensuring communications issued by the government are not disrupted.
Yet for all the difficulties Spain's leadership might be facing as its people and media turn their backs on them, some of the most disconcerting reports were those that suggested leaders in other countries are also following suit. Tuesday, several media outlets reported Rajoy had spent the wee hours of Monday morning on the phone with U.S. President Barack Obama and German Chancellor Angela Merkel, asking for help in what second-largest Spanish newspaper ABC called a diplomatic offensive to halt the harassment caused by the debt.
But, according to reports, leaders in Washington and Berlin were silent to the desperate pleas. Said silence, by the way, was a better response to the one given by leaders in France and Italy to Madrid Tuesday, after the Spanish government issued a statement on behalf of the three countries demanding the immediate application of rescue measures agreed to by the euro zone countries during a summit late last month. Paris and Rome both disavowed the statement, with an unnamed Italian official telling Spain's El Economista newspaper the Spanish government must have been hallucinating when they sent out the joint press release.
The global political class, it appears, is finally reacting forcefully to the crisis in Spain. Unfortunately for the Spanish, the reaction is boiling down to two words: screw them.