Investment Contrarians

Enough Is Enough; Spain Needs a Bailout

By for Investment Contrarians |

Enough Is Enough Spain Needs a BailoutIt would appear that Spain is still somewhat delusional regarding its ability to avoid having to ask the European Central Bank (ECB) and International Monetary Fund (IMF) for emergency capital. I previously discussed this issue after Spain’s finance minister, Luis de Guindos, said, “Spain doesn’t need a bailout at all.” (Source: “Spain FinMin’s ‘No Bailout’ Remark Causes Laughter,” CNBC, October 5, 2012, last accessed November 12, 2012.) Yet, the country is still being unrealistic in its view and is now facing a financial crisis that will likely worsen.

Maybe Spain doesn’t realize that when one of every four of your citizens has no job to go to, there’s a problem. The ECB’s buying of troubled and overpriced Spanish bonds in an effort to reduce the financing charges represents a bandage solution to a financial crisis. Spain talks about the lower yields. Yes the 10-year yields on Spain’s bonds are no longer over 10.0%, but at the current 5.9%, these yields are still comparatively high and not sustainable. Now, if Spain can get its yield down below three percent, then maybe the bond-buying will help; but until that happens, I’m not convinced, and Spain will continue to walk on a tightrope and see its financial crisis deepen.

Spain doesn’t want money, as it knows that emergency funds also come with strings attached: being told what to do with its budget, spending, and austerity measures.

Yet something must be done or Spain’s financial crisis will worsen. The problem is that Spain, like the United States, is facing muted growth, and a tough austerity program would bind Spain’s spending and would impact its ability to climb out of its recession. Spain is declining in its economic strength. The country’s economy fell to 12th in the world in 2011, according to the IMF. Spain’s economy was once the ninth largest, but with its financial crisis, it has since been surpassed by Russia, Canada, and India.

Spain could see its economy contract by a worst-than-expected 1.5% in 2013, according to the country’s central bank. Along with this would be continued high unemployment and the inability to recover out of its recession. And if the country cuts spending more, the negative impact on growth and its recession could likely be more devastating and could drive the financial crisis.

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 IMF. This has the makings of a financial crisis.

What Spain needs to do is reorganize its finances, just like a company that is struggling with its books would. Spain must follow the business approach to recovery.

The idea is that Spain would receive bailout funds to help grow its economy, create jobs growth, and pay its debt, while it puts together a tough austerity program.

Without short-term pain, Spain will not see long-term gains, and its financial crisis will worsen.

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