When it first started sliding down the slippery slope in December 2009, the risk premium for investing in Greece – i.e. the spread between Greek and German bonds – hit 226 basis points. The markets grew increasingly wary of the Greek economy as its sovereign credit rating underwent one downgrade after another.

Now, six months later, that risk premium has been outstripped by the spread on Spain’s sovereign debt [233 points on 17 June], which has hit record levels these past few days. The Spanish government’s response is deemed insufficient to keep public accounts on an even keel and ensure a vigorous recovery from the recession. So “speculators”, as [vice-president] María Teresa Fernández de la Vega labelled them yesterday, are betting on a rehash of the Greek scenario in Spain: that Zapatero will end up asking for a bailout and agreeing to fall back on the European Stabilisation Fund set up by eurozone leaders along with the International Monetary Fund (IMF) to guarantee debt repayments. De la Vega and economy minister Elena Salgado denied any such prospect yesterday and assured the markets that Spain is "doing its homework".

'Homework' complete

This is how the Spanish president himself terms the austerity package he’s bringing to the European summit today. It entails an accelerated reduction of the budget deficit, involving civil service pay cuts and a pension freeze; a labour market reform which, though considered “light” by employers and markets, puts the [socialist] president in a serious ideological spot; and an overhaul of the pension system. To add the finishing touch to those efforts, Spanish central bank director Miguel Ángel Fernández Ordóñez gave the final remaining signal yesterday, just in time for the summit: that the Bank of Spain deems the financial restructuring complete. In addition – in line with the script Zapatero had already laid out on Thursday – he confirmed that the so-called “stress tests” would bear that out.

All that “homework” would have been unthinkable only six weeks ago, but the markets didn’t trust any of Zapatero’s tactics, such as his decision to legislate the labour reform [approved by the council of ministers on 16 June]. Nor did the eurozone leaders, for that matter. The European Commission itself – which would like nothing better than to throw flowers at the government’s feet to get the markets to back off from Spain (and the euro) – was compelled to keep the pressure on Zapatero, demanding additional economic adjustments.

Meanwhile, some bankers are wondering whether they wouldn’t be better off requesting a bailout of their own accord, however harsh the changes exacted in return, in order to get the markets to open back up. And IMF managing director Dominique Strauss-Kahn himself is flying into Madrid tomorrow on a “business call” to find out atfirst-hand what the government has in mind. Spain is not Greece, to be sure, but the pressure is mounting to keep it that way.