Guest post from friend of Alhambra, Brian Cronin:
I could have called this essay “The Pain in Spain”, but there are so many pieces lamely playing on the “My Fair Lady” song that I decided to be a little more esoteric. In 1896, Francisco Tarrega wrote a wonderful piece of music for the guitar called “Recuerdos de la Alhambra” (Memories of the Alhambra). It is very evocative and reminds me of Spain as I would like it to be and as I remember it from my visits. So this essay is “Recuerdos de España” – Memories of Spain.
One of the benefits of foreign business travel, particularly in Europe, is that you get to stay in some very nice hotels and eat great food. You also see some of the cities you visit and not just from a taxi between appointments. If you time it right, you can arrive on the weekend and do some exploring and the best way is, of course, on foot.
I was able to see Madrid this way. Madrid is a loud, brash city, full of museums like the Prado, great restaurants, wide boulevards and vast squares. One such is the Puerta del Sol, the city’s main square and a place for people to meet. It’s full of shops, restaurants and bars, and is the place to go for a glass of wine and some nibbles and just people watch. I did just that.
But there have been few celebrations there of late. Madrileños of all ages filled the square recently to demonstrate against government austerity measures. Prime Minister Mariano Rajoy, sworn in just last December, has been fighting an uphill battle. All eyes have been on Greece recently and the debate as to whether it can tolerate harsh austerity measures. New elections are going to be held on June 17th and we will see whether cooler heads will prevail or whether Greeks will again vote with their hearts. While it is certainly true that the majority of Greeks want to remain within the euro, their actions in the upcoming election may belie that and they may throw caution to the winds. We shall see.
Depending on whose ranking you use, Greece represents only about 2.0% of the EU’s GDP, and ranks 35th in the world. Spain, on the other hand, is much bigger. It is the fifth largest economy in the EU, at about 8.5% and ranks 12th in the world. It appears to be the next shoe to drop and is causing a lot of agita both in financial circles and in the corridors of power in Europe.
Whereas Greece really is a case of excessive government spending and not enough tax revenue to support it, Spain’s debt problems are entirely different. Spain’s governments had a good record of keeping debt as a percentage of GDP within the Maastricht Treaty guidelines (less than 60%), unlike others, notably Germany and France. It was and is private debt that has fuelled the problem in Spain. Spaniards found that they could borrow at German interest rate levels and borrow they did – at a tremendous rate. This led to a property boom which has inevitably collapsed and has taken down the labor market with it. Unemployment is now close to 25% with a preponderance among the younger set. No jobs and no prospects except perhaps to leave and go abroad. And the economy has slipped back into recession.
In order to stay afloat, Spain has borrowed from the “troika” bankers (the ECB, the EC and the EU) and is having to pay up on the international capital markets. The troika has insisted that they go to the head of the line for repayment and all other lenders are subordinated to it. As in Greece, Spain has seen an exodus of funds as people who can get their money out are doing so before (they fear) it’s converted into pesetas and devalued and their savings wiped out.
To deal with this mess, the government has introduced a round of swingeing cuts, price increases and tax hikes. With the feeling that it is the faceless bureaucrats in Brussels that are pulling the strings and making the decisions and not Sr. Rajoy’s government, there have been general strikes and mass demonstrations like that seen the Puerta del Sol which was filled to capacity recently. A familiar tale. But whether it goes beyond that and explodes into the kind of violence seen in Greece or the more passive response that the Irish had, is the question.
Whereas the EU and the eurozone could probably survive without Greece, it would be a very different tale with regard to Spain. The amount of money needed to help Greece pales in comparison with what Spain needs. It is not clear whether the so called “firewall” fund, recently increased to €800 billion, could cope, despite the protestations of the zone’s finance minsters.
The effect on the banking sector has already been felt. Many of the banks are trying to cope with property loans that are under water. Sr. Rajoy promised that public money would not be used to bail them out, but Bankia was partly nationalized earlier this month. Bankia itself was only created in 2010 after merging together seven troubled savings banks and has the largest exposure to the property market. Its shares have lost half their value now and at the end of the week it was downgraded by Moody’s along with 15 other banks.
Is the Bankia bailout the thin end of the wedge? Will others be bailed out, or is it a one-off? And if the banks which are being obliged by the government to raise €30 billion more capital to cushion themselves against bad loans have to come to the government for funds, they will be structured in such a way that they will effectively be nationalized, or partly so. Not a good prospect.
All of this has prompted Sr. Rajoy to warn that if the Greek contagion spreads, then Spain might be locked out of the markets with escalating borrowing costs. The Spanish 10 year is yielding 6.33% as of this writing, nearly 490 basis points over the 10 year bund and getting perilously near 7%. He has urged the powers that be not to contemplate a euro and eurozone without Greece for fear of what that would do to Spain. The euro is already under the gun, down below $1.27 and looking soft.
It is not the Spain of happy memory.