Spain had a problem. They didn’t have a budget crisis at all before the financial meltdown, but they did have a housing bubble, one which predictably popped. Unemployment soared, the economy sank, tax revenues fell and their budget deficit widened. The choices were to stimulate their economy and return to growth, which would increase employment, or engage in austerity measures to please the confidence fairies and bond market servicing their debt. Like the rest of Europe, they went with the latter. Only there’s a funny — but predictable — end to this story – it hasn’t pleased the debt markets at all, nor has it reduced their debt burden:
Spain has set off further alarm bells among bond investors and its crisis-hit eurozone neighbours by conceding that its debts will balloon this year to their highest level for two decades.
The admission fanned fears that the recession-bound country will lose its battle to stay on top of its debts without reaching for outside bailout funds and knocked Spanish government bond prices.
Despite announcing its most austere budget for more than 30 years last week, Spain’s government admitted on Tuesday that the debt-to-GDP ratio will jump to 79.8% in 2012 from 68.5% last year.
This has led to a high cost for Spanish debt, as bondholders sought a premium for purchase. It’s a terrible sign going forward.
Although Spain has already sold around 46 percent of this year’s planned issuance of long-term debt and therefore is in a favorable funding position compared to its peers, analysts worry it could become the next source of euro zone contagion.
“It was only a lukewarm auction,” DZ Bank rate strategist Michael Leister said. “The key thing here is the volume, they fell well short of the maximum range they intended to sell.”
“This shows that the LTRO (ECB’s long-term refinancing operation) effect is losing momentum and that Spain is having a much more difficult time.”
The pattern ought to be familiar by now. A European country finds itself in debt post-recession, and seeks to cut their budget. This increases unemployment, reduces revenue and leads to a larger debt burden. The bond market gets spooked, and yields rise. Eventually, a crisis mentality emerges, and the country has to appeal to the central European authorities for a bailout. That’s what happened to Greece, Portugal and Ireland, and it’s where we’re headed for Spain.
None of this has taught any policymaker in Europe any lessons, even though we’re due for a double-dip recession on much of the continent this year. They have stubbornly pressed forward with austerity measures and fiscal tightening, basically to pay for bailouts benefiting only the finance sector, while the mass of citizens suffer. Until you deal with the main problem in Europe – where is the growth? – you will have an eternal recurrence of these crises.
Eurozone leaders say that the problems in Spain will not reach to the heights of what we saw in Greece. Contagion, they added, is relatively under control. They’ve said that before, too.