Wednesday, July 13, 2011

Spain - Next on the Eurozone Debt Hit List?

Now that the world's markets are all aquiver once again about the Eurozone debt and the spectre of the debt issues facing Ireland, Spain and Italy are making the front pages of the world's newspapers, I thought I'd take a brief look at the last of the PIIGS nations - Spain.

By way of introduction, Spain is Europe's third largest nation in area and had a population of 47,150,800 citizens at the beginning of 2011.  Spain’s main exports include motor vehicles, foodstuffs, pharmaceuticals and machinery.  According to the IEA, Spain produced only 2500 BOPD in 2010 necessitating the import of 1.438 million BOPD, making the country highly susceptible to oil price changes.  Spain's Consumer Price Index was up 3.5 percent on a year-over-year basis reflecting higher energy costs.  

In the first quarter of 2011, Spain's Gross Domestic Product grew by a tepid 0.8 percent on a year-over-year basis to €270.620 million and by 0.3 percent on a quarter-over-quarter basis.  Here is a graph showing Spain's GDP growth history since 2004 when compared to the other Eurozone nations:

GDP is projected to grow by a rather lukewarm 1.5 percent in 2011 and 2012 after seven quarters of negative growth.

Employment dropped by 1.4 percent in the first quarter of 2011 showing a net job loss of 240,000 over one year.  Hardest hit were jobs in the construction sector where the number of jobs dropped by 8.7 percent on a year-over-year basis.   In the first quarter of 2011, Spain had 23,062,000 economically active persons, unfortunately,  unemployment in Spain is rather high compared to the United States with 21.29 percent unemployment on average in Q1 2011, up from 20.05 percent in Q1 2010.  Overall, the under-25 unemployment rate in Spain hit 44.4 percent compared to an average of 20 percent in the EA17 and 20.4 percent in the EU27 with unemployment among Spain's 25 to 29 year olds reaching an average of 27.24 percent in Q1 2011.  Here is a graph from the Eurostat website showing that Spain's total unemployment rate for the month of May 2011 is the worst in the Eurozone by a wide margin and is over twice the average of either the EA17 or EU 27 nations:

Note that Spain's unemployment is much higher than Italy's (8.1 percent), Ireland's (14 percent) or that of Greece (15 percent).  Unemployment is definitely not projected to decrease by much during 2012 either with a forecast decline to only 20.2 percent.

Since we're constantly being fed propaganda by our governments that insists that low corporate tax rates are good for employment among other things, Spain's corporate tax rate is 30 percent, down 5 percentage points from 2000 and is 4.3 percentage points above the EA16 average but well below nations like France (34.4 percent), Belgium (34 percent) and Malta (35 percent).  France's unemployment rate is 9.5 percent, Belgium's is 7.3 percent and Malta's is 6.2 percent.  I'd say that the relationship between low corporate taxes and low unemployment is tenuous at best.

Spain's National Institute of Statistics also releases monthly data showing the number and value of mortgages constituted for each month of the year.  During the month of April 2011, the average value of mortgages decreased 12.1 percent on a year-over-year basis and was 4.9 percent lower than the month before.  The value of mortgages on all urban dwellings in Spain stood at €5,329 million, down 44.7 percent on a year-over-year basis.  The total number of mortgaged properties dropped to 50,089, down 37.5 percent from a year earlier.  In large part, this is evidence of the issue facing Spain.  According to ScotiaCapital's Global Real Estate Report for June 2011, Spain's housing prices were down 8.5 percent in Q1 2011 on a year-over-year basis, following a drop of 5.4 percent in 2010, 7.3 percent in 2009 and 3.9 percent in 2009.  This followed the bubble years of 2002 (up 13.4 percent), 2003 (up 16.9 percent), 2004 (up 15.3 percent) and 2006 (up 11.2 percent).  Prices increased an amazing 21.4 percent on a year-over-year basis in October of 2003 alone.  All increases are inflation adjusted.  Here is a graph showing the growth rate of Spain's housing prices in red and the price index in black:

The same chart can be perused in its interactive form at this link.

Here is another chart from the ScotiaCapital Global Real Estate Report comparing the inflation and deflation of the housing price bubble in Spain, Italy and France showing that Spain's housing bubble was the most extreme of the three nations:

On to Spain's debt picture.  

Here is a screenshot showing the outstanding nominal debt for Spain current to the month of May 2011 from the Public Treasury website:

The country's debt totals €566.0 billion ($809 billion USD) up from €496.2 billion ($709.6 billion) one year earlier.  This is a 14 percent year-over-year increase.  The average maturity for Spain's sovereign debt is 6.69 years, markedly up from 2.72 years way back in 1987.  According to the European Commissions Economic and Financial Affairs 2011 Spring Forecast for Spain, Spain's debt-to-GDP ratio is expected to increase from 60.1 percent of GDP at the end of 2010 to 71 percent of GDP in 2012 as shown in this graph (and pardon me if it's too small to read - if so, please click on the preceding link):

According to the IMF's 2011 Consultation Concluding Statement for Spain, the country's deficit fell from 11.1 percent of GDP in 2009 to 9.2 percent of GDP in 2010 as a result of measures adopted by the government in mid-2010.  The 2011 deficit-to-GDP target has been set at 6 percent of GDP and the IMF expects that this target will be reached provided that Spain's regional governments meet their own targets.  While this drop in Spain's deficit is notable, it is still well above the Eurozone's target deficit-to-GDP level of 3 percent.  It's not as though Spain is alone in this breach of protocol, 9 out of 17 EA nations are now breaching the EU target.  Much of the drop in deficit spending will be on the back of increased VAT and excise duties; Spain raised its VAT from 16 to 18 percent effective July 1, 2010.  Should the world's economy falter over the remainder of this year, all bets are off and Spain's deficit- and debt-to GDP numbers could remain at an elevated level for the foreseeable future.

The IMF also notes that unemployment is stubbornly high and is well above the Eurozone average.  They are concerned that high unemployment could create domestic economic headwinds that will result in additional downward pressure on the already decimated housing market and slower banking sector balance sheet repairs that were damaged by the decline in the housing market.  As well, the IMF notes that as financial conditions in the Eurozone deteriorate, a drop in sovereign bond prices as a result of the perceived increase in the risk of default could push interest rates higher, affecting the ability of Spain to control the decline in its deficits.

While Spain’s debt-to-GDP ratio has not reached the stratospheric levels of Greece and Italy, the country clearly has issues with the continuing drop in real estate prices and incredibly high unemployment rates, particularly among those who are under the age of 25.  This will definitely crimp the growth potential of Spain's economy.  As well, to me, it seems rather interesting that the unrest in Egypt was, in large part, related to high levels of youth unemployment. Will history repeat itself if Spain's government is forced by those who will bail it out (i.e. IMF, ECB) to impose an austerity program on its citizens?


  1. Are we seeing the death of the Euro?

  2. I don't think there can be any link between low tax and unemployment in Spain. Starting a new business is expensive and endlessly bureaucratic. Also, once you have employed someone it is impossible to fire them. I live in Spain and although I often have little ideas that I'd normally be prepared to hazard say £20k on - I know that I could easily spend that just on complying with the red tape, and god forbid, if I then wanted to close it down it would cost me another £20k. And I'd probably be chased for taxes on my losses for years.

  3. Real unemployment in Spain is actually 28%. According to the deceptive Spanish government, always more concerned with appearances than any empirical reality (I know, aren't they all etc ?)you are not unemployed unless you have already worked for a continuous period of 12 months, hence the schools and universities churn out hundreds of thousands of young people every year who are most definitely unemployed as they do not engage in any economic activity, yet are not included in the lying government statistics. My 28% comes from Hacienda's ( Spain's tax and revenue department )own statistics, somewhat more accurate.I also have had the exact same experience here in Spain as the previous commentator. Spain has a totally anti business environment, replete with a 19th century antiquated bureaucratic mindset, (giving a computer to a monkey will not make it more efficient),and the developed world's worst education system. Lowering corporation tax most certainly works when applied in conjunction with all the other relevant determiners including the level, or lack of, the 'work ethic' amongst the populace at large, political and personal corruption, social cohesion etc. Think Germany,Greece and Korea respectively and you clearly see the relevance.Then think of the Basque Country and Catalonia, the inability of Spaniards to put their Civil War behind them (that and not current realities determine how the majority vote) You cannot just use numerical data to analyse the economic potential of a country, and even less when said data is not exactly very precise.Don't forget the demographics either, along with Italy Spain has the world's most ageing population with all that entails ! Unchanged structurally Spain is as safe a bet as the Titanic at tea time !

  4. I agree with the previous comments, but there are some factors that escape from them. The first one and very important the fact is that the unemployment in Spain is not so serious as in other countries for two reasons, the help of the family and the submerged economy. For it although as per statistics the unemployment is more of the double that any other developed economy his effects are not so serious, for example Andalusia is an underdeveloped region with high unemployment index from the beginning of the democracy and her bars and restaurants are full and the SUV abound. How it is possible it is an mystery , even for me.
    With regard to the bureaucracy of the XIXth century, awful education and the entire absence of ethics of the whole society I am also absolutely in agreement, although also it happens in other countries like Italy, for example, but the Spanish economy depends largely on the rest of Europe and, as it happened in the 60s, the development of France. Germany and other countries will pull the Spanish economy up, by means of tourism and exports to these increasing markets.
    Finally it is not necessary to forget that in the last decades some multinationals and Spanish banks have obtained a spectacular development, BBVA, Banco Santander, Telefónica, Repsol, etc, with most of his business out of Spain and that any commercial chains as El Corte Ingles are the first ones in importance of Europe and the third ones of the world.
    In short Spain and the Spanish economy will go out of these problems surely, but late with regard to France and Germany and it will keep on being one of the surest countries of the world for holidays or to live. Unfortunately in Spain everything is done by very much delay, as he says an Irish saying, "reinforcements of Spain late or never".

  5. "I'd say that the relationship between low corporate taxes and low unemployment is tenuous at best."

    As per other commentators on here, I would disagree with that. There are too many other factors at play in Spain, mostly especially the overly bureaucratic and expensive business incorporation regulations and the inflexible employment rules. These were bad before but under ZP's socialists they're now a complete f**ing nightmare - which is why so many operate in the black economy.

  6. "I'd say that the relationship between low corporate taxes and low unemployment is tenuous at best."
    This is surely the case. Corporations, without exception, pay no where near the amount of tax they should. Its not surprising given how easy it is to buy politicians and how easier it is to convince a large part of the masses that the poor rich elites must be spared from paying their fair share.

  7. Well, the real issue in the case of Spain is the 180% of GDP private debt ratio... how did a minnow like Spain get all these international companies all of a sudden?... easy, borrow cheaply from german grannies and invest it in (mostly) latin american privatizations... only now all that debt has to be paid at high rates and the only way will be for these companies to sell all these assets at distressed prices or go bust... but probably both...

  8. Spain has always had high unemployment. All the red tape and high costs to legally required employ somebody and once they're hired they are very expensive to fire even if business conditions deteriorate. So most people are employed on short term term contracts and when the economy started to slow these contracts were simply not renewed. This is why unemployment exploded in Spain, even though Spain's economy actually shrank less in GDP terms the first year of the crisis than other European countries. But while this may have saved many businesses from going bankrupt, it made it much more difficult for the country to recover because so many unemployed people spend a lot less money. The other problem is that Spain's property and building sector was became twice as big as normal during the boom years. When this stupid property and building boom imploded it left the countries domestic banks with massive amounts of bad loans. They are now unable to lend to good businesses and so domestic businesses are unable to get the credit they need to expand. Spain's international companies are not affected by this problem but of course domestic businesses make up the great majority of the economy.