Up until this point, Europe has been transfixed with severing the linkage between the sovereign and the banking system. This has been a particularly big issue in Spain because as is now well known, its banks are insolvent, yet the country is trying to pass off as not needing a bailout. Of course, if RBS is correct, that is all going to change very soon as the entire country demands a formal bailout. Yet link that has been largely ignored is the link between the sovereign, the financial sector and the broad corporate sector. Because if the first two are imploding, it is only a matter of time before the latter is also dragging into the maelstrom. As of minutes ago, this has just happened, following an announcement by Telefonica, Spain's second largest company (and potentially largest depending on what Santander does any given day), that it has cancelled its dividend and share buyback for the entire year.
- TELEFONICA SAYS CANCELS DIVIDEND AND SHARE BUYBACK FOR 2012
- TELEFONICA SAYS TO RESUME SHAREHOLDER REMUNERATION IN 2013
- TELEFONICA TO CUT TOP MANAGERS' TOTAL COMPENSATION BY 30%
Why is Telefonica doing this? Simple - to conserve cash ahead of what may be a sovereign default which will have a huge adverse impact on all Spanish corporations. And where the dividend goes, M&A spending, and CapEx are sure to follow. For the self reinforcing toxic feedback loop that follows look nowhere further than Greece and its destroyed economy.
Look for the IBEX to plunge tomorrow even more on the news as investors finally grasp what is going on.