If one looks at the Spanish central government’s debt, things do not look so bad. The Spanish debt to GDP ratio is officially 72% and they only need to obtain about €26bn in financing between now and the end of the year. The problem is that these figures do not include their regions, akin to our states. The regions have been shut out of the markets and must now be financed by the central government or default. Adding the regional debt burden together with the national, Spain needs about €62bn for the rest of the year with a Debt to GDP ratio of over 100%.
In order to meet those ridiculously rigorous deficit targets promised to the Germans, something had to give. That something was transfer payments to the regions, which are now dragging the whole operation under. A similar problem is occurring in Italy starting with Sicily, which I wrote about last week. This is not just a European problem. California has been reducing payments to its municipalities for three years now, and this has resulted in the bankruptcies of Stockton, San Bernadino and Mammoth Lakes with more to follow.