Spain is the New Greece

As 25 of the 27 EU leaders signed up to the new “Fiscal Compact” (http://www.bbc.co.uk/news/world-europe-17230760) to try to prevent another crisis akin to that happening in Greece, and Greece itself sinks into further economic oblivion (http://www.bbc.co.uk/news/business-17238523), concerns about the “next Greece” have subsided from their peak.  When the European debt crisis first developed, Ireland and Portugal soon followed Greece down the bailout path and concerns were raised about both Spain and Italy, before the focus fell strongly on the latter.  Italy has seen its Prime Minister change and a degree of confidence return in its economic management.  This focus on Italy and the rapid deterioration of Greece’s situation has seen the eyes turn away from Spain, but is this where the biggest risk lies?

News today that Spain will miss its deficit reduction target by a massive margin (http://www.bbc.co.uk/news/business-17235179) – with a forecast deficit of 5.8% in 2012 compared with a target of 4.4%, a difference of over 30% – demonstrates how little progress it is making.  At a recent seminar I attended the speaker described the situation in Spain in stark terms  – “the Spanish are lying”.  The Spanish property market has collapsed, but the banks are hiding the pain.  They reposes houses, but rather than record them at their open market value, they show them at the value of the loan.  Many of the cajas (roughly equating to British building societies) only keep going on the back of funding from the European Central Bank, a significant proportion of which I understand they have used to prop up their failing pension funds, much to the disgust of Northern European central bankers.

Unemployment recently passed 5m (http://www.bbc.co.uk/news/world-16754600), equivalent to 22.8% of the working population, while youth (16-24 years old) unemployment has hit an eye-watering 48.6%.

Although Spain has a much greater industrial base than Greece, much of it world class, (Seat cars and a significant element of Airbus aircraft for example), so much of its economic effort in recent years has gone into one area: residential real estate.  While the building of houses is clearly a worthwhile activity, creating both employment and trade at the time of construction and homes for people to live in, when this activity turns speculative, it can become corrosive to the economy.  No longer primarily a place for people to live, it becomes instead an asset to buy in order to appreciate in value, despite not actually producing any economic activity once construction is complete.  Spain is now paying the price for this folly.  Just as in other countries such as the UK, USA and Ireland, appreciating house prices have given the Spanish people the illusion of rising prosperity, while the reality is one of rising debt levels rather than increasing trade, productivity or innovation.

The rising oil price could provide the straw to break the camel’s back.  Spain has no indigenous oil supplies and car ownership levels some 16% higher than the UK.

So, keep your eyes on Spain, I believe it could be an “interesting” few months ahead.

Nick

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