The Dismal Truth About Spain's Desperate Economic Situation

spain protest

Photo: AP Images

While Europe watches and waits for Spain to submit a formal bailout request to the EU and the ECB, the economic situation on the ground there continues to deteriorate.Huge protests against austerity measures engulfed Madrid recently as angry voters displayed their discontent in the streets.

Spain recently revealed more austerity in its 2013 budget, which will likely have to be modified to include deeper cuts when over-optimistic macroeconomic growth assumptions don’t materialise.

Spain also announced a 60 billion euro capital shortfall across its national banking system, but the macroeconomic assumptions used in that test are likely too optimistic as well. On top of that, more bank capital will continue to be destroyed as the Spanish housing bubble continues to deflate.

SocGen strategist Kit Juckes wrote that “all the ECB’s money won’t make recession go away and until a growth strategy is implemented by Europe’s politicians, this crisis can’t be brought to a satisfactory end.”

And right now there is no growth in Spain.

The amount of bad loans on Spanish bank balance sheets is stunning

Spanish banks had €169.3 billion in troubled loans of a total €1.71 trillion in total loans. Bad loans comprise a staggering 9.86 per cent of all loans on bank balance sheets, the highest level in nearly two decades.

Source: Banco de Espana

Spanish home prices continue to fall, exacerbating the consequences of its housing bubble

Societe Generale analyst Michala Marcussen wrote earlier this year that home prices will likely fall another 15 per cent in the 2012-2013 period. They have already dropped 25 per cent from their peak.

Citi's Willem Buiter argued in a similar note that the decline in Spanish land and property prices is probably less than halfway complete. He ultimately expects them to drop 60 per cent from their peak.

Meanwhile, the scale of Spain's private debt is simply overwhelming

Most of Spain's debtors are non-financial corporations and households who will continue to default regardless of aid for the government and banks.

Spain's economy is contracting quickly

Manufacturing is unlikely to dig the country out of recession. Although Spain's manufacturing purchasing managers index ticked up slightly last month to 44.5, it is still the seventeenth month in a row that the index has recorded a sub-50 contractionary reading.

Source: Markit Economics

The Spanish government has passed its harshest austerity measures since becoming a democracy 30 years ago

Austerity measures imposed earlier this year include €65 billion ($80 billion) in spending cuts and tax increases by the end of 2014. That included an increase in the VAT from 18 per cent to 21 per cent, and drastic reduction in the number of state-owned businesses.

Spain also just released its 2013 budget, which introduces several new austerity measures in an attempt to rein in the government's budget deficit.


Source: RTE News

Austerity has sparked massive protest rallies, highlighting the pressure on the Spanish government from an angry electorate

Popular dissatisfaction with austerity measures could compromise the effectiveness of austerity policies.

Last week, angry protesters were out in force displaying their unhappiness with austerity measures at mass gatherings.

Spain has already failed to bring its budget in line with EU standards and is overly optimistic on how quickly progress can be made

The Spanish government is targeting a total budget deficit equal to 6.3 per cent of GDP this year, revising downward its deficit outlook to 2.8 per cent in 2013. It had to revise targets higher for 2012 from a goal of 4.4 per cent EU leaders had initially demanded.

However, analysts have pointed out that the macroeconomic growth assumptions underlying the government's deficit forecasts are overly optimistic and seem unlikely to prove correct.

53 per cent of youths under age 25 are unemployed

And 25.1 per cent of the total population was jobless in August 2012.


Source: Eurostat

And Spain's autonomous regions are also on the brink

Spain's banks aren't the only ones in trouble. Poor spending habits have led autonomous communities to face impossible funding hurdles. They are now demanding bailouts from the central government with no political pre-conditions attached.

The region of Castilla La-Mancha became on Thursday the fifth Spanish region to request a bailout in recent months. Meanwhile, a burgeoning separatist movement in Spain's most economically critical region of Catalonia is adding to the brewing political pressure in the country.

Borrowing costs are lower since the ECB announced its bond-buying plan, but are still unsustainably high

Although Spain's borrowing costs have fallen over the past two months on the back of the ECB's new rescue plan, the Spanish 10-year yield is still hovering just below 6 per cent -- a level that has been seen as unsustainable since the crisis escalated in 2011.

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