Spain has so far managed to avoid
being sucked into the Eurozone periphery financial
abyss. But that might be about to change. This week protesters rallied against the relatively
modest cuts in government spending implemented so far. And upcoming elections
are a nearly-certain source of more instability:
Spain
Vote Threatens to Uncover Debt
As Socialists Risk Losing Key Areas,
Economists Fear 'Hidden' Bills
MADRID--Weekend elections that
threaten to drive Spain's ruling Socialist party from power in several
regions and cities also promise a potentially nasty surprise: the revelation
of piles of undisclosed debt in local governments that could undercut the
country's drive to avoid an international bailout.
Five months ago, a government change
in Spain's Catalonia region revealed a budget deficit more than twice as big
as previously reported. Now, a growing chorus of economists, local
politicians and business leaders say that new governments are likely to
discover, as Catalonia did, piles of "hidden debt" owed to health
clinics and other suppliers.
Economists, analysts and anecdotal
reports from companies that supply local governments suggest there is
widespread, unrecorded debt among once-free-spending local governments. Some
companies are complaining that fiscally frail administrations are pressuring
them to do business off the books and not immediately bill for goods and
services, said Fernando Eguidazu, vice president of
the Circulo de Empresarios
business lobby group in Madrid.
Such bills could add tens of billions
of euros to the official debt figures reported by
local and regional governments. If such skeletons come out of the closet in
coming weeks, Spain's cost of funding could continue to rise--throwing the
country back into the limelight after it has struggled to demonstrate it
doesn't need to be bailed out like Greece, Ireland and Portugal.
"Investors are worried about the
regions, given that there has been a precedent in Spain and other countries
of debt not being recorded properly," said Luigi Speranza,
a BNP Paribas economist.
Sunday's elections, which will be
held in 13 of the country's 17 regions and its more than 8,000
municipalities, threaten to be hard on Prime Minister José Luis
Rodriguez Zapatero's Socialists. Polls show
Socialist-led governments could be unseated in Castilla-La
Mancha, the Balearic Islands, Asturias and Extremadura regions. Undermined by
a 21% unemployment rate and a perceived slowness in reacting to the country's
economic crisis, the Socialists could also lose control of the municipal
governments of Barcelona and Seville, the country's second- and third-largest
cities.
The social fallout from the poor
economic conditions is evident in Spain this week as waves of protests swept
the country. Young people took to main squares in Madrid, Barcelona and
Valencia on Thursday to protest unemployment among those in their 20s and
30s, which has reached 50% in some areas, and the government's austerity
program. Demonstrators are hoping their ranks will swell over the weekend as
people head to the polls.
Nearly a year ahead of March 2012 Spanish
national elections, a poll last month by the state-owned Center of
Sociological Investigations, or CIS, forecast the opposition Popular Party
could capture 43.8% of the vote, while the Socialists could get 33.4%.In the
2008 elections, the Socialists won 43.6% of the vote, compared with 40.1% for
the conservative PP.
Some thoughts:
Spain has three problems, each of
which is manageable in isolation. But they're all coming to a head at the
same time and threatening to combine into something serious. They are:
·
The next-domino syndrome. Greece is clearly going to
default in the not too distant future, which will cause 1) the other
bailed-out Eurozone countries to demand better
terms for their own debt repayment, and 2) analysts and money managers to
speculate even more intensely about who is next. Spain is an obvious
candidate.
·
The fear that this weekend's elections will uncover a
bunch of off-balance sheet debt is well-founded. Many US states and cities
are hiding their true pension obligations, so it should come as no surprise
that their Spanish counterparts are running similar scams. The incentive to
spend on constituents and use accounting tricks to hide the resulting debt
has apparently become overwhelming, so we should expect to find lots of
skeleton-filled closets in coming years.
·
Spain's voters are already rebelling against the
current austerity program -- which sliced a measly two percent of GDP from
public spending. With another six percentage points to go just to reach the Eurozone's mandated deficit threshold, the next round of
cuts might turn unrest into regime change.
Meanwhile, Spain's credit rating is
Aa2 (Moody's third-highest) and its 10-year bonds yield 5.2%. Which takes us
back to the question that has been nagging euro-skeptics
for over a year: Why would anyone buy a Spanish bond? Is it reasonable to
lend money for ten years at such a low rate to a country facing this much uncertainty
-- in a currency bloc that's under this much stress?
Think it through: If the stronger
economies bail out the weaker ones on terms that allow the weaker governments
to remain in place, then the balance sheets of the stronger countries become
so junk-laden that they're no longer AAA credits. But if the Eurozone insists on austerity to bring peripheral
countries back into fiscal balance, voters will simply say no, resulting in
Greek-style crises being repeated four or five more times. Either way, the
euro is tarnished by instability, and investors who lock themselves into a
ten-year euro income stream will be sweating for a long, long time.
Two final notes:
·
First, why pick on Spain when so many European
countries have budget issues? Because Spain is the firewall. The Eurozone could bail out Greece and Portugal without
missing a beat, but Spain is too big to fail. Either it gets its financial
house in order very soon, or the Eurozone's
problems grow by an order of magnitude.
·
Second, a very reasonable complaint about US-based
criticism of the Eurozone is that it's motivated by
a desire for the euro to fail and the dollar or pound to succeed by default.
So let's address that here: The dollar and pound are in worse shape than the
euro because the Fed and Bank of England are blatantly, systematically
destroying their currencies in order to prop up a banking system/welfare
state/military industrial complex that could never survive in a sound money
environment, while the European Central Bank is at least trying to maintain
the euro's value. As a result, long term US Treasury bonds are horrendous
investments -- probably worse than the average euro-denominated sovereign
bond.
·
But in the search for the catalyst that finally pushes
the dollar over the edge, Europe's problems are interesting. The final stage
of a currency collapse is more about confidence than supply and demand. When
a society loses faith in its currency, it abandons it. Prices in that
currency soar and savings evaporate. So as we inflate away the dollar, the
key question is: what brings us to this tipping point? It might be the US
just finally spinning out of control, or it might be an event in Japan,
Europe, or the Middle East that calls the whole concept of fiat currency into
question. Whatever it is, it's coming. For better or worse, we live in an
interconnected world.
John Rubino
DollarCollapse.com
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