Will the rain fall in Spain?

By Alex Brummer for the Daily Mail
Updated: 06:04 EDT, 8 April 2011

The supporters of Barcelona and Real Madrid may feel they have little to worry about after some dazzling performances in this week's Champions League matches.

But if they dig a little deeper they might start to be concerned about the sources of the wealth which have made the two clubs so successful.

Real Madrid's bold moves in the transfer market are the result of some interesting deals in the property market engineered with assistance from the local municipality.

As for Barcelona, despite its much admired 'mutual' model it has only managed to hold its own by accumulating €500m or so of debt.

In much of this, Spanish football imitates the state of the Spanish economy.

The country's entrepreneurs, businessmen and traders took advantage of the credit explosion leading up to the 'great panic' of 2008 to speculate wildly in residential property and in buying foreign companies including our own Abbey National (the basis of Santander UK), BAA and ScottishPower.

In many ways the path taken by Spain over the last decade is similar to Ireland, where an elite of bankers, politicians and businessmen became carried away with their own invincibility.

So far, despite this Madrid has managed to avoid the wrath of the global markets which turned with such ferocity first on Greece and more latterly on Ireland and Portugal.

But it could now be Spain's turn. In recent weeks some comfort has been drawn from the fact that the lame duck government of prime minister José Luis Rodriguez Zapatero has been willing to do the right thing.

It is requiring the troubled banks to raise new capital and is seeking to stabilise the country's debt to gross domestic product ratio at 70% - incidentally the same figure the UK will have after four years of cuts!

What will be harder to control is the soaring welfare bill in a country where unemployment stands at 20% of the workforce, property prices are still under severe pressure and will not be helped by the hard line European Central Bank decision to raise interest rates.

Speculators are a little like water in a flooding house, they flow towards the weak spot and then inundate.

Up until this week Portugal was the main pressure point. But now it has succumbed to market forces the next weakest point in the eurozone likely will be attacked.

If that turns out to be Spain it will be a totally different kettle of fish for both Brussels and the IMF in Washington.

Mobilising rescue funds for the European periphery has been hard enough but Germany, as the anchor of the eurozone, and the IMF would have to dig very deeply to rescue Spain.

At the time of the Greek bailout a year ago there were questions as to whether the troubles in Athens could pose an existential threat to the euro. It is keeping Madrid stable which could be the biggest threat.

Interest rate shocks

When the European Central Bank became the first of the 'big three' to raise official rates there was little surprise.

Chairman Jean-Claude Trichet had signalled a month ago that a rate rise from 1% to 1.25% was on the cards.

The ECB regards the battle against inflation as its prime objective which is among the reasons that official rates never fell as low as they have in Britain - where bank rate is 0.5% - or in the US where the Federal Reserve discount rate hovers between zero and 0.5% and quantitative easing carries on regardless.

Trichet recognises that if he is to keep Germany on board it was necessary to underline the ECB's price stability credentials, a legacy of the old Bundesbank. Whether one thinks Frankfurt has acted too quickly or not, one aspect of the operation must be applauded.

The ECB signalled its intentions so the market was not surprised. The Bank of England declines to provide a summary of its deliberations on the day it leaves interest rates unchanged leaving the markets none the wiser.

Skid marks for the High Street

Another day and two more retailers - Halfords and Carpetright - are wringing their hands over sales and profits.

One might have thought that Halfords, as the nation's leading bike retailer, would find hope in rising oil prices and the prospects of more cycling. But apparently not and it is rubber prices causing consternation for car tyre sales.

Amid the misery Marc Bolland of M&S is continuing with his scorched earth policy on the opposition, grabbing Chris Taylor from his old firm Wm Morrison to bolster Simply Food sales.

A good strategy as long as long as the transfers work.