Spain Is Delusional Believing Everything Is Okay
Is it me or is there something wrong with the picture in Spain? Even with over a quarter of its population looking for work (and this is only according to the official numbers), over 50% of its youths unemployed, a recession, and massive debt levels, Spain says that all is fine.
Is the water different in the beautiful country of Spain? Do they not see a financial crisis?
Spain is clearly delusional regarding its ability to avoid having to ask the European Central Bank (ECB) and International Monetary Fund (IMF) for emergency capital. In October, Spain’s finance minister Luis de Guindos suggested, “Spain doesn’t need a bailout at all.” (Source: “Spain FinMin’s ‘No Bailout’ Remark Causes Laughter,” Yahoo! Finance via CNBC, October 5, 2012, last accessed December 14, 2012.) The country is unrealistic in its view and is facing a financial crisis that will likely worsen.
On Friday, Prime Minister Mariano Rajoy suggested the country did not need any financial help to lower its high borrowing costs (Source: “Spain says no need for bailout right now,” Yahoo! Finance via Associated Press, December 14, 2012.) The current yield on Spain’s 10-year bond is 5.36%, which is much improved from the over seven percent yield in July but still relatively high, given the debt buildup. High rates mean high carrying charges that add to the debt load and drive a possible financial crisis.
The Spanish economy is in a recession with gross domestic product (GDP) growth contracting 0.3% in the third quarter after falling 0.4%, 0.3%, and another 0.3% in the previous three quarters. Now, the European Commission is predicting Spain’s GDP growth will decline another 1.5% in 2013. (Source: “EU to predict dire 2013 for Spain,” Reuters UK, November 6, 2012, last accessed December 14, 2012.)
Do you sense a financial crisis getting worse?
I think that Spain doesn’t want money, as it knows that emergency funds also come with strings attached, and that means being told what to do with its budget, spending, and austerity measures. But something must be done, or Spain’s financial crisis will worsen. The problem is that Spain is facing a dire situation. The country has put forth a tough austerity program that will bind Spain’s spending and impact its ability to climb out of its recession.
The massive reduction in spending means stagnant economic growth, which in turn, translates into less tax revenue for the government at a time when the national debt is estimated to rise to nearly 840 billion euros, or about US$1.03 trillion, by 2012, according to the IMF. This has the makings of a financial crisis.
Spain is declining in its economic strength, and so is the eurozone. (Read “Reminder: Eurozone Has Its Own Fiscal Cliff.”) The country’s economy fell to 12th in the world in 2011, according to the IMF. Spain’s economy was the ninth largest, but with its financial crisis, it has since been surpassed by Russia, Canada, and India.
What Spain needs to do is reorganize its finances, just like a company that is struggling with its books would do. The country must follow the business approach to recovery to avert a financial crisis.
The idea is that Spain would receive bailout funds to help grow the economy, create jobs growth, and pay debt, while at the same time, plan for the future.
Without short-term pain, Spain will not see long-term gains, and its financial crisis will worsen.