Spanish Debt Rating Downgraded

Spain’s debt was downgraded a notch by Moody’s Investors Service on Thursday, triggering sharp declines for the euro and European bond prices on the market.

Moody’s raised concerns over the Spanish government’s ability to improve its finances in the face of disappointing growth rates and public anger at spending cuts. The ratings warned that further downgrades were possible as the costs of bank restructuring could “considerably exceed” current projections.

Spain, which has the highest rate of unemployment in the eurozone at about 20 percent, is under pressure from investors and fellow European Union member states to reduce its budget deficit which is also among the highest in the region.

The Spanish economy expanded by 0.2 percent in the fourth quarter of last year but contracted mildly over the whole of 2010.

The country’s socialist prime minister José Luis Rodríguez Zapatero has been trying to convince markets of Spain’s solvency but as the willingness of private banks to lend and invest remains low, it is difficult to imagine Spain recovering soon. Zapatero has announced labor law and pension reforms but with trade unions marching against austerity and his own approval rating down to approximately 25 percent, he may not have the political capital anymore to push for necessary spending cuts.

The government approved a budget last year that is designed to cut the deficit in half, down to 6 percent of GDP. Measures in the budget included cutting public spending by 7.7 percent, including a 5 percent pay cut for public-sector workers, and increasing personal income taxes for those earning more than €120,000 euros a year.

Spain will see its fiscal strength tested later this year when it is due to repay lenders €192 billion, about a fifth of its total debt.

As a result of increased interest it would have to pay for new borrowing, the Spanish government expects to see a rise of 18 percent in the cost of financing its debt.

Unless Spain manages to rein in public spending soon and restore investors’ confidence, interest payments on its debt will only continue to grow as a result of its budget woes up to a point where the country can no longer afford to borrow.

Earlier this week, Moody’s also downgraded Greece’s credit rating, fueling anxiety in Europe that the single currency zone is not out of debt crisis yet.

European Union leaders were due to convene on Friday to discuss a future permanent bailout mechanism for the eurozone to replace the temporary fund that was cobbled together last year after Greece’s debt crisis threatened the stability of the monetary union.

Conservatives Win in Spain’s Richest State

Spain’s Socialist prime minister, José Luis Zapatero, is increasingly embattled. Without a majority in parliament, his government has had to rely on the support of minor regional factions. But a recent victory for conservatives in the country’s richest province casts further doubt on the socialists’ ability to garner support for their policies.

Regional elections in Catalonia, both the most prosperous and most populous of Spanish regions, saw gains for the pro-business and nationalist Convergence and Union as well as the local affiliate of the People’s Party, Spain’s right-wing opposition.

The Socialists were decimated in what may well have been a forecast for more regional elections next year, if not the general election of 2012. Read more “Conservatives Win in Spain’s Richest State”

Specter of Spain’s Demise Worries Europe

After bailing out Greece and Ireland and undertaking an unprecedented rescue effort to save the single currency this spring, European leaders now fret over the fate of Spain which, as the bloc’s fourth largest economy, imperils the future of the eurozone as such.

The bailing out of Ireland with €85 billion in loan guarantees from the International Monetary Fund and its fellow European member states has temporarily laid to rest fears that its collapse could trigger debt crises throughout Southern Europe. But Portugal and Spain remained mired in recession and are unlikely to be able to restore balance to their budgets any time soon.

The eurozone would probably survive a financial rescue of Portugal which has only half the population of Ireland and an economy of comparable size — even if European Commission President José Barroso denied pressuring the country to request financial aid from Brussels today. Government spending has been on the rise for several years in the country but business, investment and trade freedoms are high. Portugal’s greatest impediment to growth may be its rigid labor market. Although unemployment hovers around 10 percent, reform of burdensome regulations on hiring and firing workers is unlikely to occur under Socialist Party rule.

The threat of sovereign default in Portugal could well affect neighboring Spain which is both Portugal’s largest trade partner and biggest creditor. Spanish banks hold some $78 billion of Portuguese debt.

A crisis in Spain, which has an economy twice the size of Greece, Ireland and Portugal combined, would severely test Europe’s ability to maintain economic stability and possibly threaten the future of the eurozone as we know it.

Spain has been mired in recession for many months with one out of five workers unemployed and a deficit that peaked at a little over 11 percent last year. The country’s socialist prime minister José Luis Rodríguez Zapatero has been trying to convince markets of Spain’s solvency but as the willingness of private banks to lend and invest remains limited, it is difficult to imagine Spain recovering soon. Zapatero has announced labor law and pension reforms but with trade unions marching against austerity and his own approval rating down to approximately 25 percent, he may not have the political capital anymore to push for necessary spending cuts.

Spain was hit hard by the crisis in 2007 after maintaining seemingly stable growth rates for over a decade. When Zapatero came to power in 2004 he was aware of the need of diversifying Spain’s economy. The preceding years of boom had been driven by a real estate bubble that was bound to burst eventually. The socialist government pledged to invest in renewable energies, bioengineering and infrastructure but six years later, it is still uttering those very promises. Meanwhile, as a result of the recession, Spain’s public finances are in a dismal state.

Following the example of many governments worldwide, Zapatero’s government attempted Keynesian stimulus which, after the meltdown in Greece this April, only added to mounting concern about the sustainability of deficit spending. Since 2008, Madrid hasn’t been able to solve an almost 10 percent gap on its budget. The public debt has since ballooned and Spain’s credit rating is under pressure.

Next year will see Spain’s fiscal strength tested when it is due to repay lenders €192 billion — about a fifth of its total debt. As a result of increased interest it would have to pay for new borrowing, the Spanish government expects to see a rise of 18 percent in the cost of financing its debt.

Unless Spain manages to rein in spending soon and restore investors’ confidence, interest payments on its debt will only continue to grow as a result of its budget woes up to a point where the country can no longer afford to borrow.

In a radio interview Friday the prime minister ruled out the possibility of accepting a European bailout. Instead, if worst comes to worst, his government may have to restructure its debt obligations, inflicting heavy losses on bondholders, many of whom are European banks. German chancellor Angela Merkel, whose taxpayers have very little enthusiasm left to help out other eurozone members in fiscal crisis, has already warned that in future bailouts, investors will have to share in the burden.

Ireland Renews Fears of European Debt Crisis

Pressure is mounting on Ireland to accept a European bailout in order to restore confidence with investors in the solvency of other eurozone members deep in red ink. With its budget deficit expected to reach 30 percent this year, fear of a meltdown similar to Greece’s this spring is mounting.

When Greece was faced with bankruptcy last April, European leaders agreed to an unprecedented rescue effort to save not only Greece from sovereign default but safeguard the future of the euro itself. With a €750 billion stabilization package, the European Commission, individual member states as well as the International Monetary Fund sought to restore confidence in the common currency. Read more “Ireland Renews Fears of European Debt Crisis”

Unions March Against Austerity in Europe

Throughout Europe people are taking to the streets to protest announced austerity measures. With conservatives in power in most of the eurozone countries, students are organizing demonstrations and unions have launched strikes against plans to cut welfare spending and raise the retirement age.

After spending billions of euros on stimulus measures and the nationalization of major financial firms, all of the eurozone is bracing for spending cuts. Despite American calls to continue deficit spending lest austerity imperil the global recovery, European governments are committed to restoring balance to their budgets. Read more “Unions March Against Austerity in Europe”

Spain Suffering from Zapatero’s Mistakes

Times are tough for Spain’s socialist prime minister José Luis Zapatero. While up north, eurozone members as Germany, the Netherlands and even France are boasting modest growth rates, his country remains mired in recession. One out of five Spaniards is out of work; government finances are a mess and unions have organized mass protests against nearly every single one of Zapatero’s attempts at emerging from the quagmire.

Spain was hit hard by the crisis in 2007 after maintaining seemingly stable growth rates for over a decade. When Zapatero came to power in 2004 he was aware of the need of diversifying Spain’s economy. The preceding years of boom had been driven by a real estate bubble that was bound to burst eventually. The socialist government pledged to invest in renewable energies, bioengineering and infrastructure but six years later, it is still uttering those very promises. Meanwhile, as a result of the recession, Spain’s public finances are in a dismal state.

Following the example of many governments worldwide, Zapatero and his socialists attempted Keynesian stimulus which, after the meltdown in Greece this April, only added to mounting concern about the sustainability of deficit spending. Since 2008, Madrid hasn’t been able to solve an almost 10 percent gap on its budget. The public debt has since ballooned and Spain’s credit rating is under pressure.

Government spending already amounted to nearly 40 percent of GDP in the years preceding the downturn; the stimulus, which equaled a little over 1 percent of Spain’s total economic output, provided for public works investments, support of the auto industry and increased social benefits. Only recently has Zapatero pushed for budget cuts, including a pay cut for public-sector workers and a 30 percent cut in infrastructure investment. His government has been trying to reform labor laws and raise the retirement age from 65 to 67 but so far, those proposals have met with vehement opposition from both members of Zapatero’s own socialist party and their allies in the trade unions.

Lowering government salaries and loosening up the labor market alone won’t steer Spain back onto a stable growth path however.

For the last fifteen years, while things were looking up, the country neglected to educate its workforce for the sort of high tech industries Zapatero dreams about. Homeownership in Spain has been heavily subsidized, leaving people today with gargantuan debts which they’re unlikely to pay off for many years to come. Banks are understandably reluctant to extend more loans and mortgages which is hurting small businessowners and young people looking to buy a house. Labor regulations remain inflexible. Employing a worker is costly; dismissing one can be nigh impossible.

The prime minister’s popularity has plummeted as a consequence. The socialists are now fifteen points behind the conservative opposition in the polls which has largely targeted Zapatero personally for failing to enact pro-growth policies. Although he is likely to try to remain in power until March 2012, when parliamentary elections are scheduled, Zapatero, who was reelected with only a 5 percent margin in 2008, may consider not running again, granting his party a chance to recover electorally.

Spain Remains Mired in Recession

The long road ahead for Spain just got a little longer as the country’s seasonally adjusted unemployment rate rose slightly in July, up to 20.3 percent. Meanwhile the country’s socialist prime minister is attempting to reassure markets that Spain will be able to meet its target of reducing its budget deficit to 6 percent of GDP next year.

Last March Prime Minister José Luis Rodríguez Zapatero was forced to admit that his government’s interventionist policies hadn’t managed to improve the economy’s long-term prospects at all. Unemployment rates have been hovering near 20 percent since the summer of 2009 with little hope of them dropping any time soon.

In December, Zapatero announced labor market reforms, among them reductions in high dismissal costs and working hours to preserve employment. The country’s labor regulations remain inflexible however. Non-salary costs of employing a worker are high and regulations on work hours rigid.

In Tokyo on Wednesday, the prime minister blamed workers for their lack of flexibility. “All countries make sacrifices today for a better tomorrow,” he said. A general strike is likely to be called by unions on September 29 unless the government repeals it plan to make it easier for businesses to hire and fire workers.

Total government expenditures, including consumption and transfer payments, have skyrocketed in the wake of the crisis. Government spending already amounted to nearly 40 percent of GDP in the years preceding the downturn; a stimulus package enacted last year to promote a recovery equaled a little over 1 percent of Spain’s total economic output, providing for public works investments, support of the auto industry and increased social benefits.

As Spain struggles to emerge from recession and fend off worries over its ability to fund its debt, Zapatero has promised significant spending cuts. The opposition is out for his head though. Conservative foreman Mariano Rajoy Brey suggested earlier this year that both the prime minister and his proposals lack credibility. “It’s not Spain that inspires lack of confidence,” Rajoy told Zapatero in parliament last February; “it’s you and your government’s way of handling the economy.” The prime minister is struggling to keep his government in power until the 2012 elections.

Markets have worried over Spain’s rising public deficit which peaked at 11.2 percent of GDP last year, dreading that the country could suffer the same fate as Greece. Zapatero assured investors that Spain does “not need assistance from the EU or IMF” however, adding: “we have never thought it will be necessary.” Nevertheless, Spain has recently seen firm demand for its bonds issuance on abating investor concerns over the nation’s ability to cut its fiscal gap.

With one in five Spanish workers unemployed, Zapatero’s popularity has plummeted in his second term in office, to 26 percent.

Long Road Ahead for Spain

Prime Minister José Luis Rodríguez Zapatero of Spain speaks at the European Parliament, Brussels, July 6, 2010 (Pietro Naj-Oleari)
Prime Minister José Luis Rodríguez Zapatero of Spain speaks at the European Parliament, Brussels, July 6, 2010 (Pietro Naj-Oleari)

Spain is the last major economy of Europe still mired in recession as its government remained committed to socialist doctrine throughout 2009. Massive deficit spending has only worsened the country’s predicament however, forcing Prime Minister José Luis Rodríguez Zapatero to finally start reining in Spain’s mounting debt.

Last month, Professor Niall Ferguson of Harvard University warned that “the contagion” currently rocking Greece would spread to other eurozone members, Spain foremost among them. The markets had woken up, he announced, realizing that the fiscal policies of countries as Spain had not been “credible”.

In the wake of the economic turndown, the Spanish government maintained a deficit on its budget of so much as 10 percent, refusing to cut on expenditures. The country’s pre-crisis growth has largely been carried by a boom in real estate. When construction came to a standstill, nearly 20 percent of Spanish workers lost their jobs. The country as a whole continues to face an enormous trade deficit on top of that.

The government simply has got to start spending less. According Bob Holderith, CEO of Emerging Global Shares who appeared on the Fox Business Network on Tuesday, “They’re going to have to get their economy under control.”

Holderith’s solution is investment, which is exactly what Prime Minister Zapatero has been hoping for. But with literally millions of people out of a job and millions of homes unoccupied there is little incentive to invest in Spain right now. Holderith admitted that the road to recovery for Spain will be a long one.

There have been some encouraging signs from domestic demand and exports recently and the country’s economy minister is supposed to be working out an austerity package that will bring the deficit down to the European maximum of 3 percent by 2013. Zapatero said that his government is “committed to these projects,” although conservative opposition leader Mariano Rajoy suggested that both the prime minister and his proposals lack credibility.

“It’s not Spain that inspires lack of confidence,” Rajoy told Zapatero in parliament last month, “it’s you and your government’s way of handling the economy.”

The conservatives are especially resistant to a proposed increase in value-added taxes which will only diminish the slight surge in consumer demand, they warn. Household consumption was up by 0.3 percent in the quarter of last year — pretty much the only good news there has been for the Spanish economy in some time now.

Bubbles, Deficits and European Arrogance

With Greece in despair and worries about mounting national debts rampant throughout Europe, it is easily presumed that those eurozone members still struggling with recession can all blame their troubles on deficit spending spun out of control. Paul Krugman notes however that there are different circumstances to be taken into account.

Spain, for instance, unlike Greece, is no victim of fiscal irresponsibility, opines Krugman. Its problems mainly stem from a decade-long housing bubble that ultimately burst in 2007. Up until then, its economy grew steadily with 4 percent a year, driven almost exclusively by a rapidly expanding real estate market. Now that construction has come to a standstill, millions of Spaniards are left unemployed with so much as two million of them living off unemployment benefits.

Krugman blames the situation on the euro. He cites the “arrogance” of the political establishment that “pushed Europe into adopting a single currency well before the continent was ready for such an experiment.”

If Spain still had its old currency, the peseta, it could remedy [its problems] quickly through devaluation — by, say, reducing the value of a peseta by 20 percent against other European currencies. But Spain no longer has its own money, which means that it can regain competitiveness only through a slow, grinding process of deflation.

The inflexibility of the euro, writes Krugman, “not deficit spending, lies at the heart of the crisis.” He doesn’t tell the whole story however. Although he is correct to point out that Spain’s massive deficit spending is more of a result than a cause of its current predicament, that same plunging into the red is doing very little to alleviate the crisis. Also, the supposed inflexibility of the euro deserves further attention.

Well before the euro went into circulation, European governments agreed, in 1997, to protect the stability of the Economic and Monetary Union through fiscal responsibility. Member states are bound by the Stability and Growth Pact to keep deficit spending under control. Greece and Space, however, among others, repeatedly violated this decade-old agreement. There is no mechanism in place to punish these countries or even stop them from doing so, which might be argued is a shortcoming of the European system.

Other member states are understandably reluctant to bail out Greece. Doing so would create the same moral hazard the banking sector, especially in the United States, is now confronted with: the expectation that if one screws up, a bailout will always be available.

This is not inflexibility; it is European countries looking after their own interests before anything else. If helping out Greece comes at considerable expense of their own prosperity, there is no reason why they should suffer for the sake of rescuing a neighbor that repeatedly disregarded treaty and behaved in an irresponsible matter that now threatens to harm all of the eurozone.

Spanish Socialism is Hampering Europe

Most of the economies of the European Union are slowly moving out of recession. Both Germany and France are boasting modest growth rates and they are pulling other countries, like Italy, on the road to recovery. There is one country that seems utterly incapable of keeping pace however and that is Spain.

Government stimuli have been of some help but the Spanish national bank warns that early signs of recovery are misleading: because imports have fallen even more dramatically than exports have, BNP-figures might appear optimistic but in truth, the country lacks a solid foundation for economic growth.

During the ten years between 1997 and 2007 the Spanish economy was almost exclusively driven by a rapidly expanding real estate market, producing a stable growth rate of 4 percent annually. In the same period the country attracted almost four million immigrants. Now that construction has come to a standstill many of these people are moving away while millions of Spaniards are left unemployed with so much as two million living off unemployment benefits.

Spain’s prime minister Rodríguez Zapatero came to power in 2004 promising to diversify the country’s economy. He intended to invest in renewable energies, bioengineering, high-speed infrastructure, construction and logistics to encourage innovation and the emergence of a solid services economy. Now, five years later, the prime minister continues to repeat his promise will little progress made in the meantime.

“My government’s ambition is to make this an innovative, creative, entrepreneurial country while upholding the social welfare state,” said Zapatero last July. He foresaw no trouble combining the two at the time. “Some people will say that a social welfare state and a competitive economy are incompatible, that innovation is incompatible with workers’ rights. They want to deregulate workers rights, deregulate social rights. That is exactly the same tune as people who say we have to deregulate the financial markets and I do not dance to that tune.”

As a result, Spain faces both an enormous trade deficit and a deficit on the state’s budget of almost 10 percent with the public debt, of course, mounting fast. Zapatero nevertheless counts on foreign investments to carry his country out of recession although no one in their right mind would entertain the notion of investing in Spain nowadays.

It’s not just money from abroad that is lacking however. Spanish banks are hesitant to borrow which is hurting small businesses and the whole of the real estate market because people can’t a mortgage.

Today, finally, the Spanish government announced long awaited labor market reform after unemployment reached a staggering 19.3 percent in October this year. Zapatero proposes to provide for greater flexibility, reducing high dismissal costs but also reducing working hours to preserve employment: a controversial step that seems unwise considering how little it did to once ail Britain’s economy during the 1970s.

Spain’s lack of recovery left the European Central Bank with a difficult choice to make. As the French economy grows once more it is expected to see inflation go up above the European average next year. France has proposed to temper it by increasing the interest rate (a step Australia and Norway have already taken) although this would hurt the Spanish economy terribly by further depriving it of credit. The Bank had to chose between serving France, whose recovery is helping other European economies also, and supporting wearisome Spain because its own government lacks the political will to do so. For the time being, it elects do to the latter, maintaining the interest rate at 1 percent.