Walker's World: The Spanish agony

By MARTIN WALKER, UPI Editor Emeritus  |  July 23, 2012 at 6:30 AM
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WASHINGTON, July 23 (UPI) -- Europe's rescue of Spain was finely crafted to provide just enough money to keep the troubled banks afloat and able to buy just enough bonds to sustain their government's deficit. It was going to very tight but just about possible to keep the show on the road for the rest of the year.

Then came Valencia. One of Spain's 17 semi-autonomous regions, Valencia last week in effect declared bankruptcy and asked for a bailout of its own from the Spanish state. The region of Murcia made its own bailout request Saturday. Another four, including the economic powerhouse of Catalonia, are predicted to follow suit.

Together they will more than exhaust the $23 billion fund that Spain announced last week to bail out the regions. Despite the promise of a loan from the national lottery for about one-third of the sum, it isn't clear that Spain has the money for the rest of the fund; it will almost certainly have to be borrowed, swelling the deficit yet further. And Spain last week was paying 7.27 percent on its 10-year bonds.

"There is no money left to pay for services," said Spanish Treasury Minister Cristobal Montoro, as the government last week pushed through yet another $79 billion austerity and tax-raising package. "We have to raise VAT (value-added tax) to stay in Europe. There is no other option. All alternatives are worse. This has gone beyond ideologies."

This is going to get worse. The government confessed Friday that there was no prospect of recovery anytime soon and predicted that gross domestic product would decline again next year by around 0.5 percent.

With Spanish banks reeling as the proportion of bad loans reached 9 percent, few independent economists think the economy will even hold up that well.

"Spain is learning what it feels like to be Greece," commented the Financial Times Saturday, a quip which was the more cruel since the European Central Bank had announced Friday that "for the time being" it would no longer accept Greek government bonds as collateral.

The deepening recession has slashed tax revenues for the Spanish government and also for the regions, whose income fell more than 6 percent in the first quarter of this year.

One of the biggest sources of revenue for the regions and local governments is stamp duty and transfer tax on property sales, which was a plentiful source of money while the property boom rolled on. But the boom turned into a bust in 2008 and there are a million empty or unfinished houses and apartments in the country. Property tax revenues have been in free-fall and even after their declines in 2009, 2010 and last year, they fell another 23 percent in the first quarter of this year.

But the regions and municipalities are locked into long-term contracts, which make it very difficult to fire their employees, whose numbers swelled by 427,000 since 2002.

The regions find it tough even to trim the generous perks and pay rises they awarded in the boom years. Earlier this month, the region of Catalonia had to raise an emergency loan of $607 million to pay the annual holiday bonus for state workers. To borrow that money they had to pay more than 13 percent in interest. This isn't just a Spanish problem: Portugal's supreme court this month struck down a government plan to cut wages of public employees.

"The countdown to self-destruction of the euro is already under way," commented the latest issue of El Economista.

The irony is that Spain's interest rate jumped higher Friday, the day that was supposed to resolve the crisis with the final approval by the other eurozone members, including the Bundestag, Germany's parliament, of loans to recapitalize Spain's banks.

That should have been good news. But the loans came with conditions. First, they were defined as loans to the Spanish state, which increases the country's sovereign debt burden. Second, Finnish officials said they had only approved it because they were getting undefined "collateral" from Spain on Finland's quota of the loan.

So far, the Spanish government has been able to keep hope alive by pointing to a modest recovery in exports and the usual summer uptick in employment as temporary workers are hired for the peak tourist season. But even though Spain is the world's fourth most popular tourist destination, usually providing about 10 percent of the country's GDP, this year looks grim as Spanish holiday-makers stay home.

A study released by the Spanish Federation of Hotels and Tourist Lodgings showed the decline in domestic bookings particularly hit northern and central parts of Spain, but also hurting the Balearic and Canary Islands.

"Every day we wake up to bad news," said federation Chairman Juan Molas, noting that the recession was deterring Spaniards from taking vacations at home or abroad.

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