Spain Spending its way into the Abyss

by Luis R. Miranda
The Real Agenda
March 9, 2012

The continuous rise in public spending in Spain is deeply braking the back of the country’s capacity to keep up with one of the most dire economic situations in the Euro zone. In the last 4 years, Spain has not been able to cope with one of the highest unemployment rates in the developed world. The outcome of the worldwide financial crisis that began in 2006 was not helped by the Spanish government’s socialist policies that are limited to increasing government spending in order to meet its obligations.

Spain's Prime Minister Mariano Rajoy

Much like the socialist government of Barack Obama in the United States, the Prime Minister’s office now headed by Mariano Rajoy, the leader of the Spanish People’s Party, continues to increase the burden known as the public debt. In a recent before the Spanish Congress, the Secretary of Labor, Fátima Bañez García, presented a new plan which seeks to perpetuate the status-quo: promote economic recovery and employment through a government led initiative that balloons public debt and sponsors policies that maintain the welfare state. This model doesn’t seem to work in countries where it was adopted, but for some reason, some European nations, including Spain, believe it is the way to go.

Given the lack of positive results, both the public and private sectors have begun to raise awareness about the unsustainable growth of the debt, which has shed no real solutions to the country’s out of control unemployment problem. Different from other countries in the region, Spain suffers from its skyrocketing 22% unemployment rate — according to official numbers. Depending on what sectors of the economy you look, this number grows even larger. €706 billion have not been enough of a stimulus for the Spanish economy to rebound, mostly because that money is not invested in growing sectors that were once the pillars of a stable nation. Incredibly, Spain’s public debt amounts to more than 60 percent of its gross domestic product — €1.07 trillion — much of which is spent in government operations and welfare programs that yield no significant results.

Currently, Spain’s public debt is larger than the number calculated by the European Union under its standards. Every year, the Spanish government adds mode debt to the deficit but the country does not produce enough to compensate for such spending. According to the Financial Times of London, in 2012 Spain will see an increase of its debt of €60 billion, which is equal to 6 per cent of the GDP. Despite the gigantic commitment made by Rajoy’s government, the amount of euros needed for Spain to keep up with its liabilities and entitlement programs overruns any attempt to overcome them. Meanwhile, the country will have to continue paying bank bailouts, contracts and financing the lives of the dependent classes which continue to rely on the government to get a job, food or any other form of support they need.

Although the government of Spain announced its intention of paying off billions of euros in overdue bills, interest rates on those unpaid bills may grow beyond the reach of the government’s possibilities. It is estimated that Spain’s public debt will soon amount to 87 percent of its GDP, leaving little or no room for error and very little time to implement more effective policies that bring about change to the economy. If the Spanish are not able to lift themselves out of their crisis, the country might need to follow the same path than Greece, which was forced by the European Union to accept financial aid in exchange for remaining as part of the bloc.

In the case of Greece, the infamous bank bailouts did not work, the debt was not liquidated and the country is in an even more dire situation today than it was before the bailouts. As a result of accepting the conditions imposed by the banks, which used the European governments as proxies to operate, Greece has renounced to its financial, economic and social sovereignty, but has not obtained any positive result. Whether Spain will follow in Greece’s steps it is not clear right now, but since the country has already accepted bailout money, it is likely this trend will continue as it happened with their European neighbors.

According to financial experts, Spain’s financial outlook does not look too good. The point of no return — although for many already here — seems to be when Spain’s obligations get to 90 percent of its GDP, a moment when experts say the country will find it difficult to maintain its house in order and to respect its own fiscal policies. As things are going today, some see Spain’s intention to cut its public debt to about 60 percent by 202o as an impossible task.

Incidentally, two of the main reasons why Spain fell into the financial hole it is now are the construction bubble, which exploded just previous to the beginning of the crisis — as it happened in the United States — as well as the adoption of a renewable energy subsidies program under the government of José Luis Zapatero. The program, according to a government report, returned zero euros from investments and instead created a hole in the employment market that cost 2.2 jobs for every job “created” by the state. In other words, for every job that was created by the green energy program sponsored by the Spanish government, the country lost 2.2 job positions.

The economic crisis and the Spanish government involvement in bailout programs that sought to rescue banks in that country made it so the public debt increased to 363 percent of the GDP in 2011.

As it often happens, once governments start to run out of options, they go to the last possible of them: corporate acquisition of public resources. That is, a massive transfer of money and property held by the government in representation of the people, to the hands of large corporations — mostly banks — which are the organizations responsible for the current global financial crisis, but that somehow found fertile land in government to ask for financial bailouts while charging those same governments interests on the money lent to them. In Greece, large corporations are now the owners of much of the country’s patrimony including its islands and major infrastructure. As the months go by and no solutions are presented by the Spanish government to reduce the impact of the ongoing economic depression, which include the liquidation of the debt, it is likely Spain will end giving away its financial and political sovereignty away, as well as handing out its infrastructure and resources to the banks, just as Greece did.

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European Central Bank acts to prop up debt of Italy, Spain

By Anthony Faiola
Washington Post
August 8, 2011

LONDON—Moving to stem panic of an escalating debt crisis in Europe, the European Central Bank on Sunday signaled it would intervene in bond markets to prop up hard-hit Italy and Spain, as world leaders scrambled to calm investors before the opening of financial markets Monday.

The reluctant decision by the ECB underscored the gravity of a crisis that some fear could lead to a messy breakup of the euro zone if not quickly contained, and which has gathered fresh urgency following the downgrading of U.S. debt by Standard & Poors.

Worried investors have been dumping Italian and Spanish bonds, driving their borrowing costs to record levels in recent days and sparking fears the world’s 7th and 12th largest economies could be engulfed by the same kind of crisis that forced far smaller Greece, Ireland and Portugal to request emergency bailouts. By intervening in bond markets, however, the bank could at least temporarily take some of the pressure off both nations by buying debt that private investors now see as too risky.

The ECB, as is customary, did not explicitly say it would buy Italian and Spanish bonds. But it strongly suggested in a statement that it would do so, with its move amounting to an admission that the bank’s tepid dabbling in bond markets last week did not go nearly far enough in calming investors. The bank’s governing council agreed after an 11th-hour emergency teleconference on Italy and Spain to take more drastic steps “to ensure [bond] price stability in the euro area.”

The move came as European leaders Sunday were scrambling to calm investors jittery over the crushing debt of wealthy nations. Without further steps from governments and central bankers, analysts fear more drops in global stock markets – with bourses in the Middle East, open on Sunday, tumbling ahead of the opening of key Asian trading.

A European official who declined to be named given the sensitivity of the issue said “a range of international discussions” was coming together Sunday. Those talks were set to include conference calls between G7 financial chiefs.

German Chancellor Angela Merkel and French President Nicholas Sarkozy issued a joint statement backing moves by Rome and Madrid on Friday to speed up austerity measures and adopt reforms to improve stagnant growth.

Opposition in fiscally conservative Germany, by far the largest economy in the 17-nation euro zone, to intervention by the ECB was seen as one major factor holding the bank back. But the ECB, in the text of its statement Sunday, appeared to interpret Merkel’s joint statement with Sarkozy as a sign of grudging acceptance from Berlin that more must be done.

With concern increasingly centered on Italy, whose debt amounts to a whopping 119 percent of its national economy, Merkel and Sarkozy “especially” welcomed the announcement by Italian Prime Minister Silvio Berlusconi “to achieve a balanced budget a year earlier than previously envisaged.”

Raj Badiani, an economist with IHS Global Insight in London, called the ECB move “an attempt to provide a sharp jolt to the negative sentiment engulfing Spain and Italy.”

But he and others warned it may only be a short-term solution. The ECB cannot indefinitely intervene in European bond markets on such a grand scale. A program that goes on too long could trigger inflation and undermine the stability of the euro. Rather, the ECB may effectively be buying time for European leaders to do something they have thus far failed to do — take decisive action to end the crisis.

Analysts have been calling for European leaders to greatly expand a bailout fund to cover a worst-case scenario in Italy and Spain. But European leaders were doggedly sticking to a July 21 agreement that once again shored up Greece while also allowing rescue funds to be used to buy up the bonds of troubled nations in times of crisis, much like the ECB.

But the pool of cash available, about $616 billion, does not approach the level needed to aid Italy or Spain, and European leaders have showed no signs of agreement in raising that amount. In addition, all 17 nations in the euro zone still need to ratify that deal before it can go into effect.

Europe, led by Germany, has bailed out Greece, Ireland and Portugal. But German voters have had it with bailouts, and in a worst-case scenario Italy would need roughly $1.4 trillion — or more than double the size of the current European rescue fund.

Rather, Europeans leaders and the ECB seem to be banking on temporary intervention to give Italy and Spain time to make good on their pledges to restore market confidence through budget cuts and long-awaited economic reforms.

“I suspect it could help to stabilize Italian bond yields at current levels, and help to deflect some of the financial contagion hitting Italy,” Badiani said. “However, we will need to see much more detail about the scale of the proposals and the pace of implementation before there is any significant unwinding of the bond yield rises of the past month.”

If Italy or Spain fails to quell market panic, analysts say, Europeans might be forced to move toward the advent of a new euro-bond, putting the economic weight of Germany behind its profligate neighbors. But Germany and other northern European nations remain opposed to such a deal, as well as the more radical step of a more established fiscal union that would go further in turning a vast chunk of Europe into one giant economy.