Debunking Misconceptions about the Spanish Situation

Spain Tests Waters on Aid Conditions – WSJ.com.

The Bear and the Arbutus (Strawberry Tree) in the Puerta del Sol (Sun Gate) in Madrid. The bear eating the fruit of the tree is the heraldic symbol of the city of Madrid.

This article repeats the budget spin of the Spanish finance ministry with Europe’s blessing. Spain is in a fiscally untenable position and needs a bailout. Current lower interest rates are merely cosmetic and reduce the perception that Spain requires a bailout but not the actual need for one.The Spanish government faces two tough regional elections on October 21, 2012, so everything you see and hear from Spain is predicated on delaying the bailout request until after that date.

Do you see the two charts attached to the article?

image

The one on the right is off by €16bn. I examined the Spanish Finance Ministry’s website and added together all of its bond sales from the beginning of January to the last sale on September 6. I got just over €102bn in gross debt sales.

The chart on the left relies on rosy predictions for this year’s deficit and GDP, so it is probably wrong, too. The Spanish government has a budget deficit target of 6.3% of GDP, and they insist that they are on track for this number. However, it actually ran a deficit of 4.04% for the first half of the year, which projects to 8.08%. Furthermore, GDP is dropping more than expected. This will only increase the true budget deficit in two ways: by reducing projected revenues and reducing the denominator in the deficit to GDP ratio.

My detailed analysis of Spain’s financial situation is here:

https://dareconomics.wordpress.com/2012/09/06/actual-spanish-financing-needs/

According to my research and something called “math,” Spain needs to finance at least €90bn based on an 8.08% budget deficit. Note that a pattern has developed with failing countries during the Eurocrisis. The numbers without exception always get worse as the year drags on and the vicious circle of budget cuts rears its ugly head.

The number above is frightening, but it is also very conservative. It uses the 8.08% figure, which will worsen. Furthermore, I assumed that the bank bailout will only cost €100bn. Bank bailouts are always worse than the government initially reports. It’s easier to add more money later than shock the hell out of everybody with a good first guess.

Spain can publish rosy forecasts and fictitious budget numbers because Europe does not want to see Spain fail. If the EU began criticizing the Spanish figures, investors would totally stop rolling over Spanish debt. None of these officials want to be responsible for a Spanish crisis, so they look the other way. The mainstream media reporting the Spanish numbers without any analysis or fact-checking is merely shoddy journalism.

The fact that Spain cannot be allowed to fail puts the Spanish government and Europe in an interesting position. Europe needs Spain to accept a bailout more than Spain needs to request one. Therefore, Rajoy and Europe are involved in a high stakes game of chicken.

Rajoy does not want to accept the humiliating conditions that will be attached to German money, because doing so will effectively end his government. On the other hand, the Northern countries cannot give Spain money without humiliating conditions because these governments have to answer to a surly electorate.

Another factor influencing the game is that if Spain gets a sweetheart bailout deal, their will be backlash in Ireland, Portugal and Greece. I do not know how this will play out, but the intrigue should be fun to watch over the coming months.

 

 

 

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