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Fresh evidence of Spain's deepening economic crisis has revived fears about that nation's ability to dig out of its sovereign debt problems, and illustrates why the Eurozone debt crisis is likely to drag on for years.
Spain's gross domestic product (GDP) was flat in the third quarter, the country's central bank said yesterday (Monday). That follows anemic growth of 0.4% in the first quarter and 0.2% in the second quarter.
Even more troubling is the nation's unemployment rate, which rose to 22.6% in September – the highest in the Eurozone.
As one of the PIIGS (Portugal, Ireland, Italy, Greece and Spain), Spain has been trying to wrestle down its high sovereign debt with austerity measures. Unfortunately, those measures are driving the Spanish economy toward recession, which is making it impossible for the government to hit its budget deficit reduction targets.
"It will be very difficult to meet the deficit goals without additional austerity, which might push the economy back into recession," Ben May, a European economist atCapital EconomicsinLondon, told Bloomberg News. May thinks Spanish unemployment could go as high as 25%.
Each of the PIIGS faces the same cycle of futility – economy-killing austerity measures that erode the nations' ability to cope with their debt issues, necessitating even deeper austerity measures.
But without the economic growth to create the wealth to cope with the budget deficits, the Eurozone debt crisis will gobble the PIIGS up one by one.
Like Greece
In Greece's case, its faltering economy led to a series of bailouts from the European Commission (EC), the International Monetary Fund (IMF) and the European Central Bank (ECB), to avoid default.
But the Greek economy is among the Eurozone's smallest. If the other PIIGS, particularly Italy and Spain, descend to where Greece has fallen, there won't be enough money to rescue them.
"Unless European economies outgrow their deficits, the chance of rolling bailouts working is slim to none," said Money Morning Capital Wave Strategist Shah Gilani.
Just last week European Union (EU) leaders developed a rescue plan to contain the Greek debt crisis and prevent similar problems in Spain and the other PIIGS. They agreed to increase the EU bailout fund to $1.4 trillion (1 trillion euros), step up efforts to recapitalize banks and write down Greek debt by 50%.
But not only will the plan fail to help the economies of any of the PIIGS, it's little more than a Band-Aid fix.
"The chance of the plan to save Europe actually working is exactly zero," said Gilani, pointing out that the bailout money simply isn't there and will need to be borrowed. Even then it will only be enough to "save Greece from defaulting for about three minutes, and enough to recapitalize all Europe's teetering banks for about four minutes, and enough to prop up Italy's bond market, for about six minutes. Oh, and when the seventh minute starts, they'll need more money all over again."
Spain's Conundrum
Spain had set a target of 1.3% GDP growth for 2011, which after yesterday's news is expected to fall to about 0.8%. That will push the debt to 67% of GDP, which is less than half of that of Greece but still double 2007 levels.
Hitting that growth target was supposed to reduce Spain's budget deficit from 9.2% of GDP last year to 6% of GDP in 2011. The target for 2012 is 4.4%, which looks increasingly unlikely.
"They will never make it," Ludovic Subran, chief economist at credit insurer Euler Hermes SA in Paris, told Bloomberg Businessweek. "Our September forecast sees Spain's deficit at 7%."
Moody's Investor's Service (NYSE: MCO), which two weeks ago cut Spain's credit rating for the third time in two years, said it expects Spain's deficit for 2011 to be 6.5% and fall only to 5.2% for 2012.
Not making its deficit-reduction targets will make it harder for Spain to borrow more money.
"Missing the deficit target would destroy private-sector demand for your bonds," Harvinder Sian, an interest-rate strategist at Royal Bank of Scotland in London, told Bloomberg Businessweek. "If you start seeing big figures like 7%, then it's very problematic."
Spain's economy also is suffering from a hangover from a burst housing bubble even more severe than the crisis in the United States. Real estate losses are still rising in Spain, adding to the risk it will fall further and further behind in meeting its deficit targets, which will push the country ever closer to a full-blown Greek-style crisis.
All of the uncertainty is eroding investor confidence in Spain's ability to solve its debt woes – which could end up lighting the fuse to the financial meltdown everyone fears.
At a recent seminar in Helsinki, noted economist Nouriel Roubini warned of just such an outcome, saying that both Spain and Italy would need a "bazooka" to "have a fighting chance to avoid insolvency."
"Once you have lost the market confidence, and the market doesn't know how much fiscal effort you're going to do, how much reform you're going to do, who's going to be your government, they put pressure on your spreads," Roubini said. "You look insolvent."
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Derivatives: The $600 Trillion Time Bomb That's Set to Explode - Money Morning:
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The Only Way to Solve the European Sovereign Debt Crisis - Bloomberg News:
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Spa
in all the countries of the world the politicians have spend like mad men to stay in power by over taxing the middle class and under taxing the rich by their fiscal policy. every citizen have asked for more free money like free medicare, medicaid, drug and pension programs etc…… the rich have asked for tax concession so they can create jobs. when things turn souer, nobody wants to let go some of those programs or at least lower the benefits to adjust them to the incoming money in the government coffers. at the end there is abuse in the system by all poor, middle class and rich. so what do the government do, increase taxes and borrow. how can you pay for all that tomorrow when you cannot pay fot it today. simple the politicians are great genious; they borrow more money.
when banks are about to louse big money in a commercial loan they ask the government for a special program so they can save their capital. you have recently saw a sun energy co. get a 500,000,000.00 loan just to go bankrup months later. just yesterday the same happen with mf, i bet the banks got or will get
their loans paid back before. so lets save the bank and get the working class pay for it after all they are all in zomby world by expecting that time will take care of the problem or a new politician will after all he promised it during the campaign. yes they can!
recently it was reported that in italy boat owners never registered theyr boat in italy and refused to explain why and with what money they bought them if not black money. same for houses build without even being registered. now the middle class will be called to pay for the rescue. black money all over and all over the world.
finally where is honesty today. no banker, mortgage brokerpolitician or businessmen went to jail for their fraudulant loan that have put so many people on he street. what is a $50,000.00 / $75,000.00 a year worker thinking buying a a $500,000.00 house if he had not been coned into it by legal loan shark.
i guess the death of michael jackson is more important to the people than politics, economy, education, cheap stuff made here but now made in asia and sold here at wal mart. good luck to all university grad waiting for a job after graqduation. may i recomend applying for one in china, vietnam, cambodia or any asian country where we have exported all those jobs. jood job afl/cio.
lets hope the hand of god will all save us from those morons.
you all have a good day.
Andfort knows the problem. The Western World has been transferring its wealth to Asia for decades and now we see the result. Our housing implosion is the direct result of job losses to the new sweatshops of China, Malasia, Thailand, Singapore, and the Philippines. We can keep printing paper money to compensate, but the coming inflation will only make matters worse. The only real fix: restore a positive balance of foreign trade to the West and diversify income with new manufacturing jobs because cash hoarding by our capitalist bigshots is not helping average workers. China is forcing us into a trade war.
It looks like, maybe, Ireland will be able to exit the PIIGS group earlier than any other nation, leaving just PIGS, which has a better ring to it…
A lot depends on the international economy, because Ireland is such an open economy. But the austerity measures are beginning to turn the tide. The "unfortunate" (I am being euphemistic here, you understand – people should be shot for that) Bank Guarantee is a major part of the problem, but at least that's now fully quantified, and looking a bit better than originally feared.
And our European colleagues are very anxious to have us succeed, to show it can be done.
In the meantime, just in case, I'm learning German. Probably should be trying out Mandarin too.