As so often occurs during a crisis, events are so fast-moving and far-reaching that it is often a tremendous challenge to keep up. Yesterday, the Rajoy Government gained parliamentary acceptance for a budget stability law which compels Spain to achieve a balanced budget by 2020. With the economy in rapid reverse and likely to stay that way for some time, achieving this objective will be incredibly difficult. Last year’s fiscal deficit was 8.5% of GDP, or around EUR 90bn.

Recognising that much of the fiscal slippage encountered last year occurred at the regional level, Rajoy continues to press the governments of these 17 autonomous regions to honour the budget commitments Spain has made to Brussels. A number of ministers have recently lambasted some of the regions for their excesses. The budget stability law just passed allows the central government to intervene in the financial affairs of regional fiscal miscreants. This in turn has lit the touch-paper on that perennially sensitive subject in Spain, namely regional autonomy. One of the major criticisms levelled at Spain over the past decade is the explosion in public sector employment and the attendant inefficiencies that often accompanies such a huge presence. As Rajoy and his senior finance officials have made clear, it remains imperative for Spain to convince international investors of its credit-worthiness, or else Spain will suffer the same fate as the likes of Greece, Portugal and Ireland.

Unfortunately, the constant brush-fires evident at the regional level are being replicated in the equally troubled banking sector. Although some Spanish banks took advantage of the ECB’s generous provision of liquidity (via the LTRO), this has merely papered over the cratering being experienced on the asset side of their balance sheets. The Bank of Spain has already proposed that banks in Spain increase their provisions by EUR 50bn. Given the rapidity of the decline in property prices, this will likely need to be raised significantly.

For good reason, the Rajoy government has gained the plaudits of international leaders. However, bond investors are more circumspect, because they suspect that, despite his best endeavours Rajoy will be unable to prevent Spain also falling into the hands of international creditors. The ECB must be desperately hoping that the latter does not occur. Ramping up the SMP will cause huge divisions within the ECB and another helicopter drop of liquidity via a third round of LTRO would look desperate and would probably also fail to mollify investors.

As most money managers around the world now appreciate, Spain is the elephant in the room for the major asset classes.