Spain, debt and the chicken little squad

May 29, 2010

The chicken little squad of debt doomsters has now moved on from Greece and Portugal to Spain. Spain with a population of 45 million   finds itself   in a difficult spot because of the severe impact of the 2007- 2008 financial crash which hit its construction sector hard.Spain had been experiencing a boom, perhaps even a bubble in home construction. The Mediterranean coast , a region that I know reasonably well from several lengthy tourist visits ,has had a number of property booms and busts over the years.This one is particularly severe and overall industry has also suffered a big downturn. Unemployment which had fallen for Spain to historic lows of under 9 % has more than doubled to 20 %. Hardship for the Spanish population has been widespread. There are 4.6 million people currently unemployed in Spain.The left of centre government has enacted an austerity program in response to demands from the financial interests that buy Spanish bonds.I think that this austerity will not help because it will prolong the high unemployment but the bond raters perversely   might like it.
But let us examine the Spanish debt and deficit situation more carefully than the hysterical headlines in the business press. First of all the debt to GDP ratio is under 60 %, hardly the stuff of calamity. The deficit which reached 11 % of the GDP in   response to the crisis in the years preceding it was very much smaller and even in the middle of the past decade a   small surplus.Revenues have suffered a shock and expenditures have risen dramatically in response to the crisis.

I have just spent the last hour going through the Spanish Finance ministry's data bases and the results are far from the gloomy assessment of some of the headline writers in the financial press. Unemployment is clearly far too high and real estate will probably be depressed in value for sometime(although there may now be some good long term investments available in what is one of the more beautiful warm countries in Europe) but I would bet that Spain will recover as Europe recovers. The risk of default on their debt given the backing of Europe provided the ECB does its job and an irrational spike in interest rates is avoided is very unlikely.

Unemployment in Spain 2001 to 2010

2001       10.6 %
2002       11.5
2003       11.5
2004       11.0
2005         9.2
2006         8.5
2007         8.3
2008         11.3
2009         18.0
2010Q1     20.0

Source: Spanish Ministry of Economy and   Finance