Spain, as those 1990s tourist brochures used to tell us, is different. And it certainly shouldn’t be confused with Greece. Even a cursory look at the most basic of maps should satisfy any doubts we might be harbouring in that regard. But being different is not the same thing as being economically sound. Which is what Societe Generale’s Klaus Baader has just tried to argue in a recent research note entitled “9 reasons why Spain is different”. “The Spanish bond market was hit hard in the wake of the quantum leap in the Greece crisis. But fundamentally the case for Spain remains strong,” he tells us.
In singling out the nine points that Klaus advances in support of his thesis for detailed examination, I do not do so because I find the arguments particulary bad (or even especially “noteworthy” in the negative sense). He has a point of view, and he is doing is job, and in neither case can I fault him for this.
The reason I have decided to single Klaus out for special treatment here is because he conveniently brings together, in a clear and succinct fashion, a number of arguments which are widely accepted and used by both analysts and policy makers. Unfortunately the fact that arguments are widely held does not make them valid, or in anything other than the most trivial conventialist sense “true”. Indeed it is precisely because I feel that these arguments are not well founded that I have decided to reply to them in this rather detailed way. Basically I don’t buy the idea that Spain is simply suffering from a crisis of confidence, one which, in its turn, puts pressure on the government bond spread. I think Spain has a problem in the fundamentals department, and unless this problem is first accepted and then addressed the wrong (inadequate) remedies will continue to be applied, putting the Eurozone and its citizens at risk of financial catastrophe in the medium term.
Argument Number One:
– Public sector debt is low and will stay low.
“Spain’s public sector debt ratio of 60.1% in 2010 is nearly one third below the euro area average. Excluding potential bank bailout costs, but also privatisation receipts, debt is expected to peak at less than 70%”.
Not so! Or rather not necessarily so, since the beauty, here as always, is in the details. Certainly Spain’s public debt to GDP ratio is low by European Union standards, and significantly below the EU average. But it is not the case that it is universally expected to peak below 70%. In fact the IMF (to name but one) expect Spanish government debt to GDP to hit 72.1% of GDP in 2014, rise to 74.13% in 2015, and stand at 75.94% in 2016 (according to their April 2011 World Economic Outlook forecast).
In fact, we don’t yet know where Spain’s debt to GDP will peak, or when, since there are too many unknowns in the equation to reach a definitive conclusion, all we do know for sure is that it continues to rise, indeed according to Bank of Spain data released last Friday, by the end of the first quarter of 2011 Spain’s gross debt was up again, and stood at 63.6% of GDP.
There are many factors that could condition the size of the debt to GDP ratio, the unpaid bills on regional government books (93.6 billion euros at the end of Q4 2010), the 83 billion euros given by the government in guarantees (or 7.8% of GDP, a quantity which will only be turned into debt should the guarantees need to be honoured), the debt which is languishing on the books of public sector companies (55.
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