Thursday, July 12, 2012

The Pain in Spain Continues

Along the way I have warned that Spain suffered from significant macroeconomic challenges that, at the time, appeared unrecognised by the markets. I also provided some analysis that the country’s problems were far greater in magnitude than something than could be fixed by simply lowering government sector deficits:
The private sector accumulated large debts on the back foreign capital inflows leading to a housing bubble.  This bubble has since collapsed leaving the private sector in a position of significant wealth loss and indebtedness, the banking system holding significant and growing levels of bad debts and the economy structured around the delivery of a failed industry.
The growing unemployment is leading to a slowing of industrial production, which means that even though the country is importing less it also appears to be exporting less. Combine this with the interest payments on borrowings from the rest of the world and at this point Spain continues to run a current account deficit which, in the most basic terms, means Spain is still paying others more than it is being paid back. That is, the external sector is still in deficit.
So with the external sector in this state and the private sector unable and/or unwilling to take on additional debt as it attempt to mend its balance sheet after an ‘asset shock’, the only sector left to provide for the short fall in national income is the government sector. If it fails to do so then the economy will continue to shrink until a new balance is found between the sectors at some lower national income, and therefore GDP.
It may appear logical to you that this must occur, and I don’t totally disagree, but that doesn’t change the fact that under these circumstances there is simply no way that the private sector will be able to continue to make payments on the debts it has accumulated during the period of significantly higher income. This is a major unaddressed issue. (my emphasis)
And this is the monetary trap much of the European periphery now find themselves in. Structural issues within their economies together with their pseudo non-floating currency means they are neither able to shrink nor grow out of their debts. Without significant debt restructuring they are left to flounder in a viscous spiral downwards.
Read it at Macro Business
Spain: The next leg down
By Delusion Economics

The most recent EU summit concluded with a memorandum of understanding (MoU) for Spain which by most accounts appears to largely reinforce the failed bailout measures used for Greece, Ireland and Portugal. In return for bank bailout funds, that are obviously inadequate, Spain must remain “committed to correct the present excessive deficit situation by 2014.” Although the allowable deficits for 2012 and 2013 were raised, the new levels are still overly optimistic given economic conditions. Recognizing this reality, Prime Minister Rajoy has already decided to raise VAT taxes. Considering that Spanish housing still has further to drop and the external sector is unlikely to improve, based on worsening global growth prospects, the pain in Spain will continue.

Related posts:
Spain Should Bailout Households Not Banks
Despite Bailouts, Irish Banks Remain Insolvent...Spain Too?
Private Debt Continues to Drag Down Europe

No comments:

Post a Comment