Europe’s Future Lies, Ominously, with Spain
A massive €750 billion ($1 trillion) bailout fund announced by European officials just six months ago has failed to contain the sovereign debt crisis that now threatens to bring down the euro single currency. After having spent €110 billion to rescue Greece from bankruptcy in May, Europe and the International Monetary Fund on November 28 announced a rescue package worth €85 billion to prevent a financial meltdown in Ireland. Europe’s debt contagion now threatens to take down Portugal and possibly even Spain.
A debt crisis in Spain would make the problems in Greece, Ireland, and Portugal look pale by comparison; at €1.3 trillion, the Spanish economy is bigger than those three countries combined. Spain is the fifth-largest economy in the 16-nation euro zone, the ninth-largest in the OECD, and the eleventh-largest in the world.
Analysts say the price tag for a Spanish bailout could exceed €500 billion, leading many observers to conclude that Spain is too big to be rescued, and that a Spanish default would almost certainly lead to the breakup of the euro zone.
Spanish politicians insist that Spain is not dancing on the edge of the abyss. Spanish Prime Minister José Luis Rodríguez Zapatero, for example, has dismissed speculation that the country would need a bailout as “complete madness.” Spanish Finance Minister Elena Salgado says Spain will “absolutely not” need help from the European Union, and that the country is in “the best conditions” to resist “speculative attacks.”
But investors — spooked by the size of the bailouts for Greece and Ireland — are not convinced, and the extra yield they are demanding to hold Spanish 10-year debt rather than rock-solid German bunds, Europe’s benchmark securities, has surged to its highest level since the single currency was introduced in 1999. That spread, or difference, represents the extra interest cushion investors are demanding to hold Spanish debt, which is now perceived to be more risky than ever.
With its borrowing costs rising, the Spanish government on November 24 was forced to freeze a plan to sell €13.5 billion worth of state-guaranteed power-revenue bonds until the volatility in sovereign debt markets abates. Spain was also forced to nearly double the interest paid on short-term bonds in an auction on November 23.
Spain’s problems largely stem from the collapse of the country’s housing and construction sectors, which accounted (directly and indirectly) for nearly one quarter of Spanish GDP before a speculative real estate bubble began to burst in 2007. The ensuing spike in unemployment, coupled with a sharp drop in domestic consumption and a steep decline in tax revenues, among myriad other woes, have all combined to leave Spain mired in its worst recession in 60 years.
The Bank of Spain projects that GDP growth will be zero in 2010, after falling nearly 4 percent in 2009. Spain’s jobless rate is stuck at 20 percent, almost twice the EU average. At the same time, Spain’s benchmark IBEX stock index is the euro zone’s worst performer this year after Greece.
Spain’s debt to GDP ratio is expected to climb from 53.2 percent last year to 64.9 percent this year and 72.5 percent next year. But investors are particularly concerned about Spain’s gaping budget deficit, which at 11.3 percent of GDP is the third-largest in the euro zone, and which may exceed that of Greece this year, according to the European Commission.
In late May, the Spanish Parliament narrowly approved a €15 billion austerity plan to rein in the public deficit and ease fears of a Greek-style debt crisis. The measure, which is intended to reduce the deficit to 6 percent by 2011, includes cutting the pay of public sector employees by 5 percent and freezing that pay next year. The plan also calls for suspending automatic inflation-adjusted pensions and scrapping a payout parents get for the birth of new children.
Although these measures won Zapatero some respite from the markets, they also left his political future hanging in the balance. In the face of public strikes organized by Spain’s largest labor unions, as well as a more than 10-point decline in support for his Socialist Party, Zapatero put off other reforms. Now, with the crises in Ireland and Portugal, nervous investors are once again focusing on Spain’s public finances.
Standard & Poor’s, the credit ratings agency, believes Spain is caught in a Catch-22 situation. If the government cuts public spending at the level needed to reduce the deficit, it will drag down economic growth and make it more difficult for Spain to emerge from recession. But if the government fails to reduce spending, the chances increase that Spain will default on its debts.
After considering Spain’s no-win situation, Standard & Poor’s on April 28 downgraded the country’s credit rating by one notch to AA from AA+, with a negative outlook. “Our conclusion is that challenging medium-term economic conditions will further pressure Spain’s public finances, and additional measures are likely to be needed to underpin the government’s fiscal consolidation strategy and planned program of structural reforms,” Standard & Poor’s said. “The negative outlook reflects the possibility of [another] downgrade if Spain’s fiscal position underperforms to a greater extent than we currently anticipate.”
Since then, other ratings agencies have also downgraded Spain’s credit rating. Fitch Ratings on May 28 removed Spain’s AAA credit rating, dropping it by a notch, on expectations that moves to cut the country’s debt will slow its economic growth. Fitch said that despite Spain’s promise to cut its budget deficit, government debt is likely to reach 78 percent of GDP by 2013, compared with less than 40 percent before the onset of the financial crisis in 2007 and the subsequent recession. Fitch also expects that the “inflexibility” of Spanish labor markets and the restructuring of Spain’s banking sector will hinder efforts to stabilize the economy.
Moody’s Investors Service on September 30 cut its rating for Spain to Aa1 from Aaa, citing a weak economic outlook. Moody’s said the downgrade reflected the “considerable deterioration” in Spain’s public finances, and added that the slow growth of the Spanish economy would make repairing the public finances far more difficult.
These concerns were subsequently confirmed by Bank of Spain Governor Miguel Ángel Fernández Ordóñez, who recently told the Spanish Senate that the outlook for Spain “is surrounded by uncertainties.”
In any case, the prospect of more cuts in government spending will not be well received by Spanish voters, most of whom view cradle-to-grave social welfare benefits as an inalienable right. With Zapatero — whose 2008 campaign promises alone added up to more than two percent of Spain’s GDP — trailing badly in the opinion polls, it seems unlikely that he will voluntarily implement politically costly fiscal reforms before the next general election, which is tentatively set for 2012. Plans to overhaul the pension system and push through additional changes to wage-bargaining and employment rules have already been postponed until at least next year.
According to Deputy Finance Minister José Manuel Campa, the best thing “to generate credibility in the Spanish economy is to execute the measures we have announced at the time and in the way they were announced, and that implies not taking additional measures.”
But that approach may not be enough to reassure jittery markets that Spain will be able to repay its debts. Economists say that given Spain’s large deficits and poor long-term growth prospects, any failure to achieve government targets for cutting the deficit, and/or any rise in Spanish bank risk, could cause a market panic and turn Spain into the next victim of market contagion.
A financial meltdown in Spain would have repercussions far beyond the Iberian Peninsula. For starters, many analysts believe a debt crisis in Spain would trigger a similar meltdown in Italy, which is the fourth-largest economy in the eurozone, and which suffers from many of the same financial woes that are plaguing Spain. What’s more, Italy has one of the world’s highest public debts, expected to reach a staggering 118 percent of GDP in 2010.
Given the relative size of the Spanish economy, financial turmoil in Spain would likely also doom the single European currency, and with that more than 60 years of European dreams of transforming the continent into a superpower-like United States of Europe capable of counter-balancing the United States of America on the global stage.
Germany, which arguably has more invested in (and also has benefited more from) the European Union than any other country in Europe, is alarmed by the potential unraveling of the euro. German Chancellor Angela Merkel says the prospect of serial European bailouts is “exceptionally serious,” and that while she does not want to “paint a dramatic picture,” it would have been hard a year ago to “imagine the debate” now taking place in Europe.
In an effort to save European monetary union — which like the European Union itself is essentially a political project — Merkel has taken the lead in trying to “reassert the primacy of politics over the financial markets.” She says governments cannot and should not be blackmailed by excessive financial sector risks, carrying all the costs of a crisis while the financial sector collects all the private gains. In quintessentially European fashion, she is demanding more regulation, tougher regulation, and quicker regulation of the financial markets.
In the meanwhile, Spain could solve its most urgent financial problems in one bold (albeit practically difficult) move. Withdrawing from the euro would permit a fiscal devaluation that would instantly increase Spain’s competitiveness and allow the economy to grow. A currency redenomination and devaluation would allow Spain to make its exports and tourism more competitive, and to free the country from the European Central Bank’s tight monetary policy designed for wealthier EU member states.
On the other hand, staying in the euro will mean years of slow growth, making the pain of fiscal adjustment prolonged and more painful. Moreover, as long as Spain remains a part of the euro, it will forfeit full control over many levers of economic policymaking; Madrid’s policy tools are now essentially limited to reducing spending and wages. In this context, some economists believe Spain cannot recover from the current crisis until it breaks free from the euro.
But Spanish pride stands in the way. For many decades Spain — geographically situated at the periphery of Europe — was the butt of an oft-repeated joke which held that “Europe ends at the Pyrenees Mountains.” The implication was that Spain formed part of Africa, not Europe. In this context, the vast majority of Spaniards view Spain’s joining the European Union in 1986 and the European single currency in 1999 as a national rite of passage.
Not surprisingly, most Spaniards if given the option would rather see Spain default on its debts than withdraw from Europe’s single currency. If the financial markets are any gauge, however, both options may become part of Spain’s future.
Spain is a nation of filthy, degenerate, depraved, Jew-hating Nazi scumbags.
Bankruptcy is the least of the things these *ssholes deserve.
Agreed
That’s one hell of a broad brush you’re wielding there, to put it very, very kindly.
and you, who are you to promote such a hate, you certainly aren’t better !
“The Bank of Spain projects that GDP growth will be zero in 2010, after falling nearly 4 percent in 2009. Spain’s jobless rate is stuck at 20 percent, almost twice the EU average. At the same time, Spain’s benchmark IBEX stock index is the euro zone’s worst performer this year after Greece.”
That’s all you really need to know. Spain is doomed and Europe knows it. Spain is one of the largest socialist nanny states in Europe. Spain has massive unemployment benefits as well as social-welfare benefits and its austerity cuts have not even made a dent in them. With high taxes and a jobless rate stuck at almost 20 percent, there are fewer working people able to pay taxes into this government and a high percentage of out of work people who still need unemployment benefits. So if less money is coming in and a lot of money is still going out from the government, something has got to give and that “something” is the Spanish government.
Nobody seems to be asking the Spanish government how it intends to increase badly-needed tax revenues in order to pay down its debt. They think that by cutting some services and borrowing more money, the problem will be solved. Well, it doesn’t seem to be working in Greece, so why would it work in Spain? What ALL the European countries are doing now (with the exception of possibly Germany) are temporary fixes that will enable them to plod along until the money does finally run out. Until these countries find new ways of increasing productivity as well as revenues, then they are bound to fail. Obama really needs to pay attention to this. If he goes down the road of massive spending with little or no spending cuts and higher taxes, we will follow Spain, and Greece, and Ireland, and Portugal, and all of those other socialist countries that finally ran out of spending “other people’s money.”
Merkel has said IMF/EU backstop/bailouts won’t be enough. That investors (bondholders) will have to take pain (haircuts). This has raised uncertainty in the bondmarkets.
Spain needs to issue or rollover around 250 billion euros in debt in the next 3 years. Unemployment is still rising. And the housing market has likely another 30% downside still left. There is no way this doesn’t get worse.
Expect the ECB to have to buy Spanish bonds. They will not like it one bit. But they will do it. They have no choice. The Euro is going down.
On one hand, I’m glad these countries are implementing some kind of fiscal austerity. On the other hand, I don’t think they’re really learning anything from it. As soon as this crisis is over (if the Euro doesn’t crash) then it’s back to the old ways.
” In quintessentially European fashion, [Merkel] is demanding more regulation, tougher regulation, and quicker regulation of the financial markets.”
That is simply false.
Allowing bondholder losses is a more American and less interventionist stance given that either a debt restructuring or liquidation of bondholder debt would occur in a free market.
Let’s give credit where it’s due. Merkel’s solution is just a less extreme version of what the Tea Partiers were saying in the ’08 TARP fiasco.
You can’t pay lavish social benefits with real money. You need play money like Mexico, Argentina or Brazil.
Spain needs cuts and needs a 5% surplus next year. Cut, cut or get out of the Euro-zone and print play money to pay social benefits.
Let’s assume for a moment that a Spanish fiscal crisis does start the breakup of the EU. Will the stronger economies remain in a smaller, stronger union or will the idea of a European Union vanish entirely?
I rather suspect that the withdrawal/escape/expulsion [depending on point of view] of any of the Eurozone countries from the Euro will lead to the ultimate collapse of the whole affair.
Consider, finances and politics are intertwined. What was the first demand made of Ireland by Brussels once they had Ireland firmly in their grasp? That they increase their tax rates so as to not draw businesses from the core EU. In effect, they were desperate to kill the Celtic Tiger. Similarly, what was the first demand that they made to the Eastern European countries they absorbed? To raise their taxes for the same reasons.
Let us say that one of the PIIGS countries pulls out/is expelled and re-institutes its own currency. That currency will by its very nature be drastically devalued vis-a-vis the Euro. That spells competitive advantage for any multi-national corporation, and it becomes more worthwhile for them to consider moving operations to the former Eurozone country. Good for the country, bad for the EU, which has to still support their current welfare states, plus take the losses of sunk costs in the PIIGS. If the former Eurozone states have half a lick of sense [far from a given as the Socialist virus has dug itself in deep]; they will offer a reasonable tax rate, that plus the devalued currency, will get them within the Laffer Curve. And the EU core countries will be [insert crude metaphor here].
Their only possible responses would either be economic or military. Rule the last one out. Ain’t gonna happen. The only economic response would be to raise tariff barriers and/or try to legally prevent corporations from moving operations out of the Eurozone. However, it will not prevent the multi-nationals from putting new operations outside the Eurozone, and with good reason.
Best case scenario, a reduced EU becomes even more uncompetitive, economically moribund, and over regulated.
The “Best Case” is not going to come. The world has concentrated on the PIIGS. They have not watched the other looming crisis. When the Eastern European states were brought into the EU, European banks went on a huge lending spree there, just as the EU was killing off the economies of the countries by imposing EU level taxes and EU level regulatory chains on commerce. As we speak [and I believe I have the order right without looking it up], banks in Austria, Belgium, France, Germany, and Britain have huge outstanding loans in Eastern Europe that are non-performing; and total more than half of their GDP’s.
They have been playing the same kind of games that US banks have been playing to keep non-performing mortgages off the books to avoid bankruptcy. That game cannot be carried on forever. The core EU and/or the separate countries where the banks are cannot bail them out and still have the Euro be worth anything. The Eurozone is engaged in Cheyne-Stokes breathing.
The finances are going to have political repercussions. When recession/depression hits with a vengeance, national governments are going to have to do something. It will be like a fight in a prison yard. Regardless of the cause or groups involved, convicts will first gather by race, so that they feel that they can trust their back.
Nationalities are going to do the same thing. And since the easiest response is for governments to blame troubles on the evil foreigner….
Political union? Economic union? DOA.
And that does not factor in the two demographic time bombs that are beyond remedy. First, Throughout the EU, overall birth rates having been below the 2.1 per female needed to replace the population. They are aging and have fewer working age people to support the non-working population. Not sustainable. Second, within those figures there is the sub-group of imported Muslims who are not integrated into their societies, and whose birth rate runs from 5-7 per female, and has been for decades.
That means that the most dynamic fraction of the population is increasingly foreign and hostile. In France itself, the best estimates are [France will not issue a formal estimate] that 12-15% of the population is Muslim, demographically weighted with the majority under 30 years old. Right now there are more military age Muslims in France than Gallic descended persons of military age.
Worst case is going to be a Europe wide, multi-faceted version of the 30 Years War. ….. with nukes as part of the equation.
In this Christmas Season, I wish you tidings of comfort and joy; because there is none in Europe.
Subotai Bahadur
Thank you for the great reply; I think I’ll swipe it in trying to explain the situation in Europe to my friends who still think Europe is the “shizzle”.
Oh, and Merry Christmas, Happy Chanuka, pleasant holidays yourself.
Brilliant, cold-blooded, well-reasoned, and witty. Great post, Subotai, I offer you a toast from the Albuquerque Airport. Things are going to get interesting.
ah, Subotai, welcome back
don’t be so pessimist, Europe still is the wealthiest continent of the planet if it only wanted to act together !
Anyway, looks like, that altogether the 27 state can’t have a common agenda for the future, and certainly not the one defined by Brussels fashist servants. Let the time working out, probably that we’ll revert to smaller associations, depending on our individual states interests, like we did with UK for Defense”… Germany and France still will have to work with each other in common enterprises sharings, so that no new conflict of egos will happen in the future again, (as it was the founding motive of a EU at the beginning, Saarland enterprises and banks initiated between the 2 WW conflicts didn’t disappear with WW2…)
a correction, France has little investments in the eastern republics compared to Germany’s, Austria’s, Sweden’s…
12% of Muslims, it’s in your nightmares, so far they aren’t so prolific, if they aren’t newcomers from subSahara, the muslim families tend to not make more children than a average french family, social subsidies make them as wealthy than the French, only poor families have lot of children, something to trick their fate, as much as economical (children are sent to get the money) as much as symbolical (communauty traditions)
Did anyone ever see that episode of Beavis and Butthead where they have to sell candy bars, and they keep borrowing the same two dollars between themselves, promising to pay the other back later?
It was a good one.
didnt one of them sell a candy bar to mr anderson then, whoever sold it, “bought” a candy bar from the other with the $1 from the only sale?
they then proceeded to devourer all the bars handing the $1 back and forth–
agreed, a classic episode
This simply can’t be true. Wasn’t I just reading about the success of the Spanish wind power initiative? Now you are going to tell me that expensive electricity is not the answer to all our problems. Well, all Spain’s problems anyway.
For us, it will be different, this time, for sure.
MarkD:
There is abundant wind power inside the suits of Mr. Zapatero and his “nemesis” Mariano Rajoy leader of the PP opposition party(sarcasm warning: they are both the same).
They are going under and dragging the whole sorry “union” with them. I think Mr. Hanson’s predictions will be confirmed very soon. Spain was turned into another California by Mr. Zapatero.
After all is said and done Europe is likely to update the old adage to “Europe ends at the Rhine” instead of the Pyrenees.
As long as toxic assets are deemed to be worth what was paid for them, instead of what they are truly worth, those who hold them need to be quarantined, lest the contagion spread to good assets.
I’m thinking that the tale of King Canute is viewed as dangerous by Brussels, as Doctor Zhivago was viewed by the Moscow Politburo.
David, I agree. If one picked any country and summed the total face value of their sovereign bonds the answer would be a big number. Then, you might identify all the real assets (no clever credit swaps or other financial tricks) backing those bonds and calculate the total market value of those assets to get another big number. One can’t know for sure, but I think that the value of the sovereign assets would be far less than the face value of the sovereign bonds for many countries in the developed world.
That may not matter if the country in question was a net earner with large current account surpluses because it could easily service it’s sovereign debt. But how many of these countries are in this position? Instead they borrow money from Sally to service the debt that they owe to Clarence. Isn’t that just one of the 31 flavours of Ponzi? The scheme will survive only as long as the lenders are willing to lend.
Did anyone bother to remember that Spain’s socialist government was also heavily vested in the putative “green economy”. Unfortunately – or is it fortunately? – the “green economy” was a bust. According to Prof. Gabriel Calzada, an economics professor at Juan Carlos University in Madrid (see: http://www.juandemariana.org/pdf/090327-employment-public-aid-renewable.pdf), every “green job” created with government money in Spain over the last eight years came at the cost of 2.2 regular jobs, and only one in 10 of the newly created green jobs became a permanent job. Brilliant! Welcome to the “green” future!
And the United States – through Obama – wants to emulate this?
Victor Davis Hanson was aked about the future of the EU on an episode of “Uncommon Knowledge” a month or so back. He predicted (accurately I believe) that the EU will not break up but will eventually devolve into some sort of impotent supra-national PR agency (employing otherwise unemployable bureaucrats) while real power flows back to the “old” nation-states. The euro will not continue. Dr. Hanson described this as the re-emergence of the nationalism that has been artificially held in check for the last sixty years by the presence of the U.S. military. With U.S. influence on the wane the “tribalism” of Europe is increasingly free to assert itself regardless of what the insulated elite in Brussels do or say.
There is no better recipe for the energizing of nationalism (in Germany at least) than a demand by the EU that successful economies continue to bail out incompetent economies in places like Greece, Portugal and Spain. And there is no better formula for nationalist resentment on their part than the refusal of states like Germany to contnue to prop them up. The tribal resentments of both the givers and the takers are the chief threat to the continuance of the EU and none of this is reported in the MSM.
Mr. Zapatero sat down as the U.S. flag passed by on his first Victory Day parade as a PM. It would be nice to see Spain return to its true call: to receive the US tourists with the usual servile smile. Apparently Palestinians and Saudis are not as generous as middle class Americans traveling the bleak Spanish landscape. But I will make and exception and stop by Barcelona to have my shoes shined and enjoy being served by Socialist slaves. Salut i força al canut!
Don’t worry about Spain. Everything is just fine there. After all, they won the World Cup.
Good ole “PU”…
Help Tom! Help Dick! Help Larry!!!
“Standard & Poor’s downgraded the country’s credit rating by one notch to AA from AA+ with a negative outlook”. Well, the end of the story will be that your rating agencies will downgrade Germany too. After all, we might have to bail out all weak European countries. And that might be the end of any organized Europe and we will go back to our roles of satellites of a certain world power. The US would love it, I am sure. Some questions might be raised: To what extent the nature(being American) of the rating agency does influence her prediction? Why the focus on Euro countries? How can you explain the situation in Iceland and Estonia? A short time ago, these countries represented successful examples of the Anglo-American economic and financial system. None of them is a “Euro country”). Why rating agencies never seem to focus on Great Britain or the US? After all, the problems started with Lehman. And no agency downgraded this bank. Why not? By the way, I am looking forward to WikiLeaks’ report about banks. In regard to WikiLeaks, it is worth to mention that your people in Berlin provided your State department with very exact descriptions of our political “elite”. Did they ask some school-children? A good method to collect informations in Germany: Simply ask. Most Germans will give you any informations you wish. You only have to be polite and friendly.
This is nothing more than the creation of a an Empire of Germany, accomplishing what Germany couldn’t accomplish by force of arms in WWII. The new Russian Empire will not be far behind.