Spain Says it Doesn’t Need a Bailout: Is it Joking?
Spain must be delusional. I just read that, in a speech at the London School of Economics, Spanish Finance Minister Luis de Guindos said, “Spain doesn’t need a bailout at all.” (Source: “Spain FinMin’s ‘No Bailout’ Remark Causes Laughter,” Yahoo! Finance from CNBC, October 5, 2012.) I’m not sure what de Guindos was thinking, but my first thought was that he must had mixed up his words and actually meant to say “Spain does need a bailout.”
If this is the actual thinking of Spain’s government, I would be quite concerned. Just last week, Spain presented an aggressive austerity plan that focuses on budget cuts in lieu of tax increases; the country is trying to avoid asking for a bailout and all of the stricter budgetary requirements that are associated with a financial crisis.
The reality is that Spain is critical to the eurozone in terms of its size and importance in the region’s economic engine. If Spain’s financial crisis worsens, as was the case with Greece, the aftershocks will likely be significant…and not just to the eurozone; they will likely also affect the global economy, including China, which is Spain’s sixth-largest trading partner since relations started in 1973.
Spain’s recession picked up steam in the second quarter, with gross domestic product GDP contracting 0.4% quarter-on-quarter, according to the country’s statistical office. GDP growth in the first quarter fell 0.6% year-on-year. Spain is in a financial crisis, hampered by its recession, high debt, high bond yields, declining growth, and significant unemployment rate of close to 25%.
Take a look at the steady rise in the unemployment rate since 2006.
Chart copyright Lombardi Publishing 2012;
data source: International Monetary Fund
For Spain, fewer jobs translate into less spending. Retail sales in Spain plummeted 9.8% in April, followed by seven percent in July, but rallying to -2.1% in August, according to the National Statistics Institute. The decline represented 26 straight months of contraction. And since 2008, Spain has recorded positive retail sales growth in only three of the 54 months!
The massive reduction in spending means stagnant economic growth; this, 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 (about US$1.0 trillion) by 2012, according to the International Monetary Fund (IMF). This has the makings of a financial crisis.
While the 10-year Spanish bond yield has fallen to 5.8% as of October 4, versus the unsustainable seven-plus percent, the financing costs are high, adding to the financial crisis.
What Spain doesn’t want is to deal with a tough austerity program that would strictly bind the country’s spending and take away its control. I’m sure Spain is seeing what Greece is going through with its financial crisis. The reality is that Spain is declining in its economic strength, while its financial crisis is worsening. The country’s economy has fallen to 12th in the world in 2011, according to the IMF. Spain’s economy was ninth, but with its financial crisis, it has since been surpassed by Russia, Canada, and India. Regardless, a collapse in Spain would be devastating.
The bottom line is that Spain needs to deal with its financial crisis and muted growth and accept the fact that the country will likely require a bailout, contrary to what Luis de Guindos claims.