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It had a huge housing boom, and is now dealing with the fallout. It has a left-of-center government and a big budget deficit, but relatively low debt in relation to its gross domestic product (GDP). And it has a worrisome current account deficit.
I'm talking, of course, about Spain, which investors clearly fear will be the next domino to fall as a result of the Greek debt contagion.
I disagree.
The Spain debt outlook is nothing like that of its Greek counterpart. When you get right down to it, Spain looks more like the United States than it does the other European "PIGS" (Portugal, Ireland, Greece and Spain, or "PIIGS," if you wish to include Italy). It's because of those U.S. similarities that Spain is fairly unlikely to share the fate of its Mediterranean neighbor, Greece, which is essentially insolvent.
Indeed, in one respect, Spain's position is actually much better than its U.S. counterpart. We'll see why shortly.
A Tale of Two Monocracies
Like Greece, Spain suffered from a reviled dictatorship that exited the scene in the 1974-1975 time frame. The dictatorship in Greece ended in 1974 with the collapse of the "Regime of the Colonels," while the curtain came down on Spain's autocracy in December 1975 with the death of General Francisco Franco.
However, both the tenure of the dictatorships and the two countries' reactions to the collapse of their respective regimes were quite different.
Greece's dictatorship lasted only seven years, was never stable, and occupied itself mostly with corruption, military expenditure and saber rattling in Cyprus. Franco, on the other hand, after winning a truly devastating civil war in 1939, devoted himself over his remaining 36 years to developing his country's economy on a more or less free-market basis, with low public spending, while maintaining an international posture of caution and neutrality.
With the two countries traveling down such divergent paths, it's no surprise that they experienced very different outcomes. By 1975, Greece was a total basket case, with only its offshore (and non-taxpaying) shipping sector flourishing, whereas Spain was a rapidly developing tourist magnet, with a substantial industrial economy behind it.
The Next Phase
After 1975, the two countries continued to develop very differently. Greece – which had exiled its king, Constantine II – elected the leftist socialist Andreas Papandreou and in 1981 joined the European Union (EU), where it became a master in the art of subsidy corruption: After all, Greece was the union's poorest country at that time.
Spain, on the other hand, kept King Juan Carlos, who thwarted a coup in 1981, elected a moderate social democrat government under Felipe Gonzalez followed by a very good center-right one under Jose Maria Aznar. The nation also developed the best luxury tourism sector in Europe, together with one of its best business schools in the University of Navarra's IESE.
Today, while both countries have similar per-capita GDPs – $33,700 for Spain and $32,100 for Greece – Spain is ranked 32nd on Transparency International's Corruption Perceptions Index, while Greece is ranked 71st – below much poorer countries like Bulgaria and Ghana.
Spain's debt load – at about 55% of GDP – is less than half of its Greek counterpart. Clearly, Greece's GDP per capita needs to be sharply deflated for the country to regain competitiveness; it's much less clear that Spain needs to do the same.
Why Spain Won't Flinch
In addition to a budget deficit of 11.5% of GDP in 2010 – very similar to that of the United States – its banking and real estate mess (though the largest bank, Banco Santander SA (NYSE ADR: STD) is pretty solid), and its relatively low debt, Spain (also like its U.S. counterpart) also has itself a left-leaning government with a proclivity for overspending.
Prime Minister Jose Luis Rodriguez Zapatero was unexpectedly elected on an anti-U.S. platform after a terrorist attack in 2004, and was re-elected in 2008 – both times by small majorities. Zapatero is undoubtedly responsible for much, though not all, of Spain's budget problems; he undertook two economically damaging "stimulus" packages in 2008 and 2009 and has raised public spending from about 38% of GDP when he took office to 46% of GDP today.
In fairness to Spain, the big run-up in spending wasn't due to a big run-up in poorly thought out handouts: The country moved enthusiastically – perhaps too much so – into the green-technology sector, to the point where an all-too-familiar boom-and-bust scenario played out.
Like the United States, Spain is stuck with its left-leaning administration until 2012 (both have four-year electoral cycles; Spain's is seven months earlier). However, it has one enormous advantage over the United States – a savings ratio (personal savings as a percentage of disposable income) that stood at an extraordinary 24.7% in the 2009 fourth quarter, compared with a mere 2.7% in the latest month here in the United States.
Admittedly, Spain's saving is highly cyclical, so the annual average is only about 20%. Nevertheless, the much-higher level of domestic saving suggests Spain should be able to finance its budget deficit domestically much more easily than will the United States.
With public debt also lower than in the United States – let alone in Greece – Spain's position is thus fundamentally sounder. It should be relatively easily able to navigate the current storm and ride out the current government's spendthrift tendencies – giving the voters the chance to put a more-fiscally-appropriate government in place in the next election.
That being said, investors have to acknowledge that panic can trample logic. Indeed, as U.S. investors learned all too well back in 2008, in a market panic even well-run institutions can get into trouble (not that many of the Wall Street houses of that year were well-run, but a few were).
The same is true of countries, and Spain under Prime Minister Zapatero has weak-and-economically damaging leadership, which the voters are stuck with for another two years. Nevertheless, with its debt rating still a very respectable "AA," only the worst storm should cause Spain to take the same kind of crisis-spawned battering that Greece continues to face.
[Editor's Note: With Martin Hutchinson, Money Morning readers have seen it time and again – the kind of creative, profit-focused thinking that's allowed him to succeed again and again where other experts have failed – one right after the other. And Hutchinson has pulled off this string of successes in the face of the worst financial crisis since the Great Depression – a financial crisis that, not surprisingly, Hutchinson is widely credited for having predicted and warned about well ahead of time.
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News and Related Story Links:
- Money Morning News Analysis:
As Scary as it Seems, Greek Debt Crisis Won't Spawn Second Global Meltdown - Money Morning News Archive:
Greece - The BBC:
Europe's "PIGS:" Country by Country - Wikipedia:
Regime of the Colonels
- Wikipedia:
Francisco Franco - Answers.com:
Saber Rattling - Athens Info Guide:
The Greek Military Junta (Regime of the Colonels), the Cyprus Dispute and the Fall of the Junta - Wikipedia:
The Spanish Civil War (1936-1939) - Channel News Asia:
Spain in eye of storm on Greek contagion fears - Wikipedia:
King Constantine II of Greece - Si Spain.org:
His Majesty the King (Juan Carlos of Spain) - Wikipedia:
Andreas Papandreou - University of Navarra IESE Business School:
Official Website - Wikipedia:
Socialism - Transparency International:
Corruption Perceptions Index - Wikipedia:
Jose Maria Aznar - EuroResidentes.com:
Jose Luis Rodriguez Zapatero - BusinessWeek:
Architecture in Recession: Spain - The New York Times:
After boom and bust, solar power finds a place in Spain - Money Morning Special Report:
The Winners and Losers in the 'Commodities New World Order.' - Money Morning Market Commentary:
European Bailout Fund Proposal … Just Another Bad Idea
A good account of why Spain is different. However one factor may not have been taken into account. Spanish Banks did not get involved in sub-prime investments but they have their own sub-prime situation in that vast amounts of flats and houses have been built in the last few years. {More new property on the Med coast of Spain than in the whole of the UK and France}. Much of this property is unsold and will take many years to sell. Not only did the banks finance the builders but they also took on whole floors of blocks of flats to sell on their
own account. With the fall in property prices it is well known that anyone looking for a bargain property in Spain goes not to the estate agent but asks to see the banks' lists of flats and houses. I had serious problems in trying to sell a house because the buyers' bank was trying to sell them one of its own in two different developments.
you didnt mention Spanish unemployment running at 20%
I love it when the so called 'experts' make predictions. Time and time again time proves that they are flat wrong but they do not have the guts to stand up and admit they were wrong when the very same event they predicted against comes to pass. LOL.
You did not mention the problems with the small banks (CAJAS DE AHORROS). Most of them are very low founded and cant lend money also they have with large inventory of foreclosure homes and flats on their pasive accounts. No bidders on Foreclosures at Court Houses.
I agree with Jeff. Good point that of housing market. the market is still adjusting and will take years before the stock of new unsold flats and houses get sold, which means that in the meanwhile, many bulding companies and banks will have severe liquidity problems.
however, reading that Spain is not the same as Greece…is quite a relief!
unemplyoment down on march by 34000.00 and real state improved by substancial figure as well.
The banks here in Spain will prove to be the weakest link in the chain. Falling house prices are undermining the bottom line of the balance sheet of many of the 'caixas' (savings banks or building societies) and already massive debts are building up. There are over 1 million apartments and houses for sale. A few caixas have already amalgamated but many, many more need to do so. The Bank of Spain is pushing hard for reforms in both the employment laws and banking regulation but the reluctance of the Zapatero government in grasping the nettle (and loosing further popularity) is a big obstacle. Both the Prime Minister and the Finance Minister are not up to the job. The recent proposal to increase the retirement age was shelved due to sabre rattling by the unions, enhanced pensions (the average state pension per month is 750 euros) and Spain's opperation of a work 12months and get 2 free similar to Greece certainly do not help The same slippery slope?, watch this space and don't invest in Spain.
The first thing I thought of was unemployment in Spain and the second, their economic engine has never been what the US engine is or was and/or could be. Plus we are much more stable politically even when our capitalistic society is under threat at the moment.
Hopefully, Spain's large investment in high-speed rail will pay off in terms of increased productivity, with people able to do intercity travel much easier.
You are wrong………. That is all.
An excellent commentary that should be read by all those "TV-experts" most of whome have never been to Spain much less know anything about Europe in general. Panic (or lack of knowledge for that matter) can trample logic.
In my potentially real cycling fantasy Spain and subsequently Portugal is my wintertime warm target after touring the northern countries during the spring to fall months. That won't change due to the slow time line of it all and I don't think the overall financial play currently being seen in the Euro community will result in an extended downturn either on the slower general, all inclusive aspect of markets' activity.
Additionally, the recent market valuations drop should lend attraction to Banco Santander price per share offerings which today hit a several months low at $10.81.
YES. WE HAVE ONE OF THE LARGEST UNEMPLOYMENT RATES. BUT OUR SOCIAL PEACEFUL ENVIROMENT AND ALMOST NON EXISTING DEMOSTRATIONS SHOWS THE STRONG SOCIAL AND FAMILY VALUES WHICH CREATE A STRONG SHIELD AGAINST ADVERSITY
I don't have your confidence in Spain at all. It has 20% undemployment, youth unemployment nearer 40%, an economy where large numbers have next to no security at work while the remainder have nice cushy overpaid public service jobs from which it is near impossible for them to be removed. During the now-over long tourism boom, the construction industry represented an unbalancedly large 20% of the economy, but has now almost completely collapsed.
We now know that Portugal may be the next domino to go after a likely Greek collapse, or Greece's being in a never ending situation of loan dependency until Germany etc finally says 'No more!' And who owes nearly one/third of Portugal's debt? Spain! So anyone who says Spain is OK, should seriously think again!
So far so good for Spain.
I live in Colombia South America, speak Spanish, and travel to Spain occasionally.
The economy of Spain is a difficult call to make. It is only since 1980 that economic conditions improved from a very weak level, and to a great extent it was due to Spain's strength for attracting tourists. A good deal of the growth in real estate was generated to attend this market.
The eventual economic fate of Spain will depend to a great extent upon the revival of that market, now practically prostrate because of what is happening elsewhere in Europe. As the strong currents of the global economy will favor Asia far over Europe, things could go badly for Spain in the future. They have a weak manufacturing sector, agriculturally they have few advantages, nor have they non renewable natural resources as does the United States.
Although they do have a high rate of savings, their ideology tends to look to the government sector to provide employment, and public employees are well entrenched and will not give up their privileges. That does not inspire faith in thier economic future.
As I said before, a tough call but I hope they make it for they as individuals are a wonderful people.
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it is true that Spain was a very difficult economic crisis, but this story is repeated all over the world in both countries large and small countries, and more that something would be the subject of bank governors and its mismanagement of the resources of the country.