Spain’s Economy Minister Luis de Guindos is in the midst of explaining his nation’s financial plans at the G-20 meeting in Mexico today. It is impossible for him to convince his counterparts that Spain has a viable way to escape a recession that approaches a five-year mark and threatens to become an outright depression. All he can say is that the central government will move ahead with austerity programs and with tax plans that might bring in more money.
Very few economists believe that budget cuts can do anything more than accelerate Spain’s GDP dive. Whether higher taxes help close the deficit remains to be seen. Value-added tax receipts did rise 11.9% in September, but the deficit-to-GDP ratio for the first nine months of the year was 4.29%, according to Bloomberg.
Spain’s ruling coalition refuses to admit that the country is painted into a corner financially. Estimates of the amount that its banks need in bailout capital are above 60 billion euros. That number could grow as bad loans do. Spain needs a bailout of its own, and the amount of that cannot be determined now, but it certainly counts as higher than the bank problem.
Unfortunately, other members of the EU cannot force a bailout on Spain. If they could, a financial disaster that could cause a technical default of Spain’s sovereign paper, much like the one Greece went through, might be avoided. The EU and IMF typically fight about bailout provisions as each jockeys for advantage in the restructuring package for a member country. Germany will have the greatest leverage, and it still wants strict budget supervision of any nation that receives aid. All in all, the debate about how to bail out Spain and under what conditions will make negotiations with the government drag on for months.
And Spain does not have months to solve its problems, at least in the short and medium terms.
Douglas A. McIntyre