Spain’s Economy: The Ugly Truth

spanish euro in pliersSpain is just a mess; the country’s economy contracted for the fifth consecutive quarter, according to the Bank of Spain. (Source: “Quarterly Report on the Spanish Economy: Economic Bulletin,” Bank of Spain, October 2012, last accessed October 23, 2012.) The bank also highlighted the 1.2% decline in “national demand,” which is essentially domestic consumer spending

The country has yet to ask for a bailout, instead trying to put forth its own budgetary goals for cutting the country’s debt load and averting a financial crisis. The situation is almost comedic, in my view. Spain’s finance minister Luis de Guindos was quoted as saying “Spain doesn’t need a bailout at all.” (Source: “Spain FinMin’s ‘No Bailout’ Remark Causes Laughter,” Yahoo! Finance from CNBC, October 5, 2012, last accessed October 23, 2012.)

Spain has put together an aggressive austerity plan, focusing on budget cuts in lieu of tax increases, because the country wants to avoid asking for a bailout and all of the stricter budgetary requirements that are associated with a financial crisis.

The reality is that Spain is crucial to the eurozone in terms of its size and importance in the region’s economic engine. If Spain’s financial crisis worsens, as was the case with Greece, the aftershocks will likely be significant to not only the eurozone, but the global economy as well, including China, which is Spain’s sixth-largest trading partner since relations started in 1973. (Get a leg up and read why you need to buy gold in “Here’s Why Gold is Heading Higher.”)

Spain is stuck in a financial crisis, hampered by its recession, high debt load, high bond yields, declining growth, and a significant unemployment rate of close to 25%.

Take a look at the steady rise in the unemployment rate since 2006.

spain ui rate chart

Chart copyright Lombardi Publishing Corporation 2012;
data source: International Monetary Fund

For Spain, fewer jobs translate into less spending. Retail sales in Spain plummeted 9.8% in April, followed by seven percent in July; but they rallied to -2.1% in August, according to the National Statistics Institute in Spain. The decline represented 26 straight months of contraction. And since 2008, Spain has recorded positive retail sales growth in only three of the past 54 months!

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$1.0 trillion, by 2012, according to the International Monetary Fund (IMF). This has the makings of a financial crisis.

While the yield on the 10-year Spanish bond has fallen to 5.6% as of October 23 (versus the unsustainable yield of over seven percent in late 2011 and early 2012), the financing costs are high, adding to the financial crisis.

What Spain doesn’t want to do is deal with a tough austerity program that would strictly bind its spending and take away its control.

In my view, Spain saw what Greece is going through with its financial crisis. The reality is that Spain’s economic strength is declining, while its financial crisis is worsening. The country’s economy has fallen to 12th in the world in 2011, according to the IMF.

The bottom line is that Spain needs to deal with its financial crisis and muted growth, and accept the fact that it may still require a bailout once its funds run dry.