“Complete insanity” is how Prime Minister José Luis Rodríguez Zapatero summed up speculation that his government had approached the International Monetary Fund to request a €280-billion bailout.
“These rumours can increase differences and hurt the interests of our country, which is simply intolerable and of course we intend to fight it,” he told reporters in Brussels ahead of an emergency summit among leaders of countries using the euro currency. The IMF also denied the speculation.
The rumours that Spain was looking for help started circulating after the European Union and the IMF agreed on Sunday to the first bailout of a euro-zone country, giving Greece a €110-billion loan over three years to help service the country’s debt, which now stands at 120 percent of GDP, most of it owed to foreigners.
Spain, in contrast, has one of the euro zone’s lowest public-debt-to-GDP ratios at 56 percent, half of which is external. But what is troubling investors more is the rate at which the debt is set to increase in light of a fiscal deficit of 10 percent and a current account shortfall of 5 percent, coupled with private sector indebtedness at 178 percent of GDP, a recession-bound economy and unemployment above 20 percent. With the Greece issue now belatedly being dealt with by the EU and IMF, anxious investors have set their sights on the other southern euro-zone countries with similar budget and debt problems. Spain and Portugal, and to a far lesser extent Italy – the other three so-called PIGS – are the targets.
Zapatero has tried hard to persuade investors that Spain is not Greece, but so far he has proven unconvincing: shortly before the Greek bailout, Standard & Poor’s, one of the three big credit rating agencies, downgraded Spain’s debt to AA from AA+. And the Spanish government’s history of hesitation when dealing with economic problems has done little to help either.
“The problem is that with Zapatero only denying that Spain has a public debt problem and not addressing the private debt issue, there’s a danger that confidence deteriorates even further,” Edward Hugh, an independent economist based in Barcelona, told the Financial Times.
Earlier this year, the government unveiled an austerity plan promising €50 billion of budget cuts to 2013 to bring the country’s public deficit down to 3 percent of GDP from 11.4 percent last year, through a mix of higher value added tax and a freeze on civil servants’ wages. It has also announced long overdue reforms to the country’s labour market and pension system, though slow progress is being made on both fronts.
The political problem
Many economists suspect Spain will have to do much more –and much more quickly– if it is to prevent a controllable deficit and debt problem from turning into a Greek-style tragedy. Politics, however, looks set to get in the way.
Having squandered the opportunity to embark on unpopular economic, labour and pension reforms when his popularity ratings were relatively high after the 2008 general election –a period in which he fervently denied that Spain was facing an economic crisis– Zapatero now faces the prospect of tackling those issues while trailing the main opposition centre-right Popular Party in the polls and with a string of potentially tight regional elections around the corner. Necessary but unpopular measures may therefore be put on the backburner or at least kept to a minimum for fear of a voter backlash that could cost the governing Socialist Party dearly in regions such as Catalonia, where the Socialists lead a coalition government and elections are due this autumn. Zapatero also faces a general election in early 2012.
With regional governments accounting for 57 percent of total public spending in Spain, there is a serious risk that national interests and the economy as a whole may find itself subordinated to entrenched regional interests, crowd-pleasing promises and partisan politics.
It is a pity then that one man's ineptitude may create such havoc. If Spain defaults or gets kicked out of the euro, Italy will be in very deep trouble. If Italy leaves the euro, France will be in very very deep trouble. Ultimately Germany itself will suffer.
If Spain does ultimately push reforms through – either voluntarily or with the IMF's boot on its throat – it will be because it is within the Euro now. Were it not for the Euro, the PIGS would never even have contemplated serious reforms. In times of crisis they would all have plunged for the easy protectionist way out: devaluation. Reform in Spain has three enemies: as the article points out, one would be the regions, the second are the unions, and the third is Zapatero himself – a man whose intellectual limitations are such that he should probably never have become PM in the first place.
It is a pity then that one man's ineptitude may create such havoc. If Spain defaults or gets kicked out of the euro, Italy will be in very deep trouble. If Italy leaves the euro, France will be in very very deep trouble. Ultimately Germany itself will suffer.
If Spain does ultimately push reforms through – either voluntarily or with the IMF's boot on its throat – it will be because it is within the Euro now. Were it not for the Euro, the PIGS would never even have contemplated serious reforms. In times of crisis they would all have plunged for the easy protectionist way out: devaluation. Reform in Spain has three enemies: as the article points out, one would be the regions, the second are the unions, and the third is Zapatero himself – a man whose intellectual limitations are such that he should probably never have become PM in the first place.