Comment: Scotland must keep weather eye on rain in Spain

SPAIN is once more the centre of the eurozone storm. Yields on Spanish sovereign debt were back over the 6 per cent red line after the government was forced to nationalise Bankia, the country’s third-largest lender, and the long-awaited announcement on bank reform disappointed the markets.

It is tempting to think that the UK is in a position to sit this one out. But there is an intimate connection between the Spanish debt saga and the British economy. It comes in the shape of major UK companies acquired by Spanish groups in the years immediately before the crash, including BAA airports, O2 and ScottishPower.

Many of these deals were funded by huge borrowing. Telefónica paid £18 billion in debt-funded cash for O2. Iberdrola paid £11.6bn for ScottishPower, £8bn of which was borrowed. Ferrovial forked out £10.3bn for BAA, which was also highly leveraged.

The upside is that Spanish multinationals have foreign earnings to tide them over during the crisis of the domestic economy. Last year Banco Santander, BBVA and Telefonica – three of Spain’s four biggest companies by market cap – made more money in South America than they did at home.

The downside is that Spain has one of the highest levels of corporate indebtedness in the world. Telefonica owes a staggering £45bn; Iberdrola ended 2011 with a debt of £26bn and Grupo ACS, a construction giant that owns Belfast, Cardiff and Luton airports, has debts of £7bn – twice the company’s market value.

This gargantuan corporate debt is forcing a reduction in domestic investment and a shedding of assets, resulting in Japan-esque stagnation. Worse, if market doubts about Spanish sovereign debt prove contagious, Spain’s companies may find it difficult, and certainly expensive, to roll over debt.

Their response has been to sell assets and deleverage. Ferrovial’s net debt at the end of 2011 was only £4bn, down from £16bn, as a result of a string of asset sales, including a 6 per cent chunk of BAA. However, there is an accounting sleight of hand here: Ferrovial now owns only 49.9 per cent of BAA, meaning the latter’s own big debts no longer appear on Ferrovial’s balance sheet.

Bowing to pressure from its banks, Grupo ACS has been forced to call off a long-standing project to take over Iberdrola, after ACS shares fell 27 per cent in April. Iberdrola – whose own shares are down 30 per cent since January – is also shifting direction, cutting investment, selling assets and focusing on cost-cutting.

Could the UK be affected? The Spanish have a good track record of giving their foreign acquisitions genuine autonomy. But the current crisis must be making group HQs back in Spain more parochial and certainly less focused on expansion. Last month, the populist regime in Argentina nationalised the local arm of Repsol, a Spanish energy company, claiming the firm was repatriating profits rather than investing locally.

However, Scotland does not seem to be suffering. Repsol and SSE Renewables have just submitted an application to build the 920MW Beatrice offshore wind farm, with construction starting in 2014. And Spanish wind turbine maker Gamesa is building a £125m factory in Leith.

My gut feeling is that, unlike some private equity investors, Spanish companies in the UK are here for the long haul. The true threat comes from a crisis in their domestic balance sheets, which are often deliberately labyrinthine and opaque.

Much Spanish corporate debt is now syndicated internationally. If Spain left the euro, a devalued peso would actually see Spanish firms saddled with even bigger liabilities. That could sink them, never mind imperil the banks that lent to them.

UK’s stubbornly high inflation has its uses

I CONFESS I forgot about this week’s meeting of the monetary policy committee. After two years of keeping interest rates on hold, it has become almost a non-event. Yet inflation – the raison d’etre of the committee – remains a stubborn problem.

Prices in the UK have risen by 15 per cent in the last four years – faster than any other G7 industrial country. This is why consumers aren’t spending. As a result, output is 4 per cent lower. Surely promoting growth has something to do with checking inflation? Mind you, that price rise is also 15 per cent knocked off the national debt.