What views can you hold about Spain?

by on May 29, 2012 at 1:57 am in Economics | Permalink

Choose A or B:

A: Spain is in a recession, which will end.  For instance, this story reports: “The OECD on Tuesday predicted more pain for Spain over the next two years when the economy will remain mired in recession with a quarter of the population out of work.”

B: Spain is in a self-cannibalizing downward spiral, as Greece was and is.  It will not end until there is, at the bottom, an absolute and total crash.

I choose B, noting that I wrote most of this post a few days ago and already A does not appear to be a serious answer.  You add up the required deleveraging, the provincial debts, the shaky state of the banks, the shaky accounting at the banks, the productivity problems, the European-wide political uncertainty, self-defeating fiscal adjustments, the broken real estate lending technology, once-again spiraling yields, broader deflationary pressures, unsatisfactory ngdp performance, the drying up of credit for small and mid-size businesses, disappearance of quality collateral, and the de-europeanisation of the capital markets, and you have B.  Oops, I forget to mention the massive proliferation of have-to-pay-them-back-first governmental senior debt claims; why wait in that line?

The fact that you are not used to seeing the credit institutions of an advanced economy unravel before your eyes — “going entropic” — should not blind you to this reality.  Nothing new bad has to happen for Spain simply to go “pop,” rather the ticking of the clock will suffice.

Note that a sufficiently large bailout plan, starting with debt forgiveness and reflation, could convert B to A, but right now we are in B.

If you chose A, you think life will be (relatively) easy.  I have spoken with numerous intelligent Europeans who believe in A, but because — in my view — they cannot grasp the terribleness of the alternatives, or the magnitude of the error of their previous attachment to the euro, not because they have strong macroeconomic arguments for pending recovery and capital market survival.

If you chose B, there are three more options:

B1: It is a political economy problem.  If the Spanish could simply institute the right policies, whatever that might mean, they could convert the destructive spiral into a mere recession.

B2: It is fundamentally a problem of aggregate demand and credit contraction.  Without a European-level major bailout and stimulus, Spain will go splat.  Yet sufficient stimulus could bring Spain back to its PPF frontier relatively easily.

B3: There is a major problem of aggregate demand and credit contraction, and a political economy problem, and this is paired with multiple equilibria.  Investors are judging whether Spain is still a major European economic force, as they had thought for a while, but perhaps had not thought back in 1963.  The equilibrium which obtains will depend upon the Spanish response to the crisis, but the best bet is to expect Spain to revert to something, in economic terms, resembling 1999 + Facebook.  The institutional quality and level of trust in Spain will receive a semi-permanent downgrade, most of all in the eyes of Spaniards, and it will look very much like an output gap but will not be remediable through traditional macro remedies.

The real euro pessimists are the multiple equilibria people.

Germany and Austria also have multiple equilibria, but those equilibria are not so far apart.  For Greece the multiple equilibria are extreme — “Balkans nation,” or “European nation”?  Or should I say were extreme?; probably we are down to one of those options at this point.

For Spain, if a truly major bailout does not arrive, the roller coaster ride down will be extreme and terrifying.  But still, we must put this in perspective.  I was in Spain in 1999 and it was very nice, the large fiction sections of the bookstores most of all, the Basque restaurants too.

I am arriving in Madrid as you read this, perhaps I will have more to say.

[insert here] delenda est May 29, 2012 at 2:25 am

I agree with B3. I agree that this will make for great tourism although crime will increase, and France is also likely to continue increasing it’s already considerable appeal as a tourist destination.

Very Serious Sam May 29, 2012 at 2:34 am

“For Spain, if a truly major bailout does not arrive, the roller coaster ride down will be extreme and terrifying”

Such bailout can’ arrive because the few remaining tripple A nations of the Eurozone just can’t foot the bill, it is a s simple as that. Besides, Italy is also already queuing up for a bailout. Behind that, see France at the horizon. So it is better to end the failed experiment Euro as soon as possible, even if this must be extreme in its ramifications. But at the end of the exercise, it will be far cheaper and more sustainable than to redesign the extremely disparate eurozone into a permanent transfer zone.

Such redesign could happen only undemocratic, as was the introduction of the EU and the Euro in the 1st place – most of the people of the EMU were never ever asked if they subscribe to this vision of the political ‘elites’. If asked, they would have voted the crazyness down. If they won’t be asked for endless transfers of money and souvereignity, hell will break lose. Europe is not and will never be a United States of. There are to many languages to start with, to different cultures, work ethics, infrastructures, checks, balances, reprimands and transparency rules.

Andres Alonso May 29, 2012 at 2:35 am

I go for B3 too. But my concern now is : what does it mean a truly major bailout?

Isaac May 29, 2012 at 3:16 am

Why is ECB lending money to spanish banks for 1 % interest and then the banks lend it to Spanish Government for 6 % interest and then Spanish Government uses that money to capitalize banks?
This seems wrong in so many ways…

NAME REDACTED May 29, 2012 at 3:32 am

if 6% intrest is so high that it will cause the spanish gov to collapse, they have far bigger problems than I thought.

ThomasH May 29, 2012 at 11:59 am

But right as a step toward reflation. ECB need to keep up the flow until Germany’s price level makes the perifery competitive again.

prior_approval May 29, 2012 at 3:51 am

‘or the magnitude of the error of their previous attachment to the euro’

Resuming eurogeddon countdown in 5, 4, 3, 2, 1 ….

After only a 9 month or so delay from its first announcement.

While not seemingly grasping that absolutely no currency has an eternal lifespan, a trite truism in Europe familiar to anyone older than those now entering adulthood in the eurozone – essentially, every single one of those adults has used two different currencies.

Big deal.

And one generation ago, Spain was a literal fascist dictatorship – I think the changes in Spain might just be a bit larger than just economics, and the EU is about more than just a currency. Though it is interesting to note that of the four countries currently suffering the most from the euro crisis, three were formerly fascist/miliary ruled states a generation or so ago.

And it is equally interesting to note that of the eastern European euro crisis countries (regardless of how much one does not hear of them any longer), all were formerly part of the Soviet Empire, directly or indirectly.

And yet in both cases, that is, the replacement of totalitarian regimes with the current ones, no wars were fought, and essentially no one was killed by this immense revolution, as these nations entered the EU.

It will all fall apart some day, of course. But considering its current achievements, and the methods used to try to continue the long running trend of Europeans living in successful democracies such as deeper economic integration, it is always interesting to read how this experirment is doomed to fundamental failure due to supposedly fundamental problems. As if problems cannot be surmounted, such as by abandong the euro while continuing the EU. Again. Or does no one here remember the failure of the European Exchange Rate Mechanism in 1992?

farmer May 29, 2012 at 11:23 am

“3 out of the 4 were fascist dictatorships”

and the other 1 had an active, fairly “hot” civil war in the form of the IRA

jk May 29, 2012 at 11:32 am

I think you are discounting the fact that the US probably spent close to a trillion dollars in defense subsidies and interest free loans such as the Marshall Plan and other reconstruction projects in Europe in the past couple decades. The whole “outspending broke the USSR idea.” So no, it’s not purely Europe standing alone that saw it through the Cold War and reconstruction.

Nor should the success of the EURO/EU be granted if it is barely a decade old and the franco-teutonic planners did not see potentially devastating manifestation of the PIIGS. Generally, societies/countries should be measured as existing for centuries or at least multiple generations before they can be termed “successful.”

prior_approval May 29, 2012 at 1:40 pm

I knew someone was going to bring this up – so please, explain how Poland, Hungary, Czechoslovakia and the other Warsaw Pact countries benefitted from the Marshall Plan funds.

And then think about the John Foster Dulles bon mot, ‘The United States of America does not have friends; it has interests,’ and reflect then on why the U.S. spent all that money defending its ‘friends.’

TallDave May 29, 2012 at 3:16 pm

You might be surprised to learn that Marshall Plan aid was actually offered to Warsaw Pact countries, and in fact Poland and Czechoslovakia tried to join the Marshall Plan but were prevented by Stalin.

http://en.wikipedia.org/wiki/Marshall_Plan

lemming May 30, 2012 at 9:18 am

I think you are confusing different altough interdependent lines in recent european history. The democratization of Greece, Spain and Portugal, the paralell democratization and liberalization of Poland and the rest of the former Warzaw pact countries and the integration of France and Germany are processes highly influenced by both the EU and american involvement in Europe.

Those processes are however not heavily influenced by the Euro. The Euro can be a failure and the EU can be a success at the same time. From my viewpoint can the EU be coined as a success even if the Euro destroys the rest of the political framework in what seems to be its inevitable fall. When the dominating alternative has been war, slaughter and oppression for centuries is an organisation who contributes heavily to the end of those not to be measured by its longevity but by its lasting impact.

TallDave May 29, 2012 at 11:48 am

I don’t think anyone is expecting Spain to start carting the Basque minority off to concentration camps. OTOH, they might have to endure a large decline in living standards, and some might question how “successful” the arrangement was.

doctorpat May 29, 2012 at 6:54 pm

I know you were deliberately setting this up, so I’ll say it:
NOBODY expects the Spanish Inquisition!

Michael G Heller May 29, 2012 at 4:19 am

I think you’re exaggerating. But this is one of your best posts. Have an interesting stay in Spain!

James May 29, 2012 at 4:43 am

If you choose B, wait until it happens then pick up a nice country house in the Pyrenees somewhere near Andorra and spend many happy months walking in the mountains while contemplating life and thinking through models and articles to write as part of your PhD. Bring on the crash I say (and SOON!!)

George May 29, 2012 at 6:33 am

Interesting tome. Alarmist? Maybe. Thought provoking? Por cierto. I don’t understand what the scope of option B is. Is the absolute and total crash a financial one or socio-political one? I know one can lead to the other but what comes first? As a home owner in Spain and a British national looking to retire to Spain (a truly wonderful country rich in tradition, history, art, and life) I am very interested on “what” Spain emerges from this crisis. It is sad to know that there is 24% unemployment and 50% youth unemployment and perhaps it is only a matter of time before anarchy increases. Desperate people may do desperate things. There is no indication that things are as bad as the Greeks have it but could they be soon? I haven’t truly thought out what I think (if that makes sense) however I write from my heart.

If it is true that cheap loans and over supply of debt (fueled by financial institutions undoubtedly) and NOT the economic & financial mismanagement of central Government is the primary cause of Spanish woes then I think the Government is morally right to call for a restructure that exits Spain from the Euro, reinstates the peseta, and forces the banks to write down personal debt to levels that can be paid back. This will be unpopular and perhaps no Government is brave enough to set aside the fact the power is granted via popular vote and any Government doing this will not get a popular vote again. Let the European banking system bear the losses, let banks go to the wall, let investors pay the price for over-speculation & greed. The introduction of the Euro was a political dream not one based on economic common sense. The only way it would work is if Europe was one common state in totality not in peoples idealistic worlds. I am pro-Europe but anti-Euro. I read the other day (on Bloomberg I think) that a Greek crash and exit from the euro would cost in excess of 1 trillion euros. A Spanish exit would surely cost many time that (?).

Spain strikes me as a country that should be self sustaining save for fuel needs. Unfortunately oil will probably become relatively expensive to import with a devalued peseta. Give the people life, give them work, give them meaning and forgive them the debts they cannot repay. Back this up with tough regulation of personal banking & borrowing.

Maybe a suspension of Government by popular vote is needed to ensure that the tough love is implemented and big business agendas are set aside.

Across the globe individuals, both individually and as a group, have shown that they cannot resist cheap money and materialism and will over-leverage themselves to do so. Their “I will worry about it tomorrow” attitude is not followed through with acceptance when things go wrong. They want to be bailed out, just like the banks and their overpaid senior bankers did. So bail them out and follow it up with tough actions and measures. Greece today, Spain tomorrow (maybe) … and then????

Bill May 29, 2012 at 8:36 am

+1

TallDave May 29, 2012 at 11:35 am

and forces the banks to write down personal debt to levels that can be paid back.

Does Spain not have bankruptcy laws?

I suppose if you let the banks go under, you can at least solve the problem of there being a big business agenda…

Ritwik May 29, 2012 at 6:40 am

What is an absolute and total crash? -3% growth for 3 years? Student riots for one week in three cities?

For an economist concerned about wealth and in general the relative importance of stocks vs. flows, you are rather alarmist about southern Europe.

msgkings May 29, 2012 at 10:52 am

If you’ve been here a while, you’ll note Tyler is pretty alarmist in general: Spain, swine flu, young people in DC, etc

farmer May 29, 2012 at 11:25 am

“What is an absolute and total crash”

see: Homage to Catalonia

TallDave May 29, 2012 at 11:41 am

Think something like, oh say a 20-40% drop in GDP, in one year. They come out looking like Poland or Latvia. Not the end of the world, really.

Bill May 29, 2012 at 1:11 pm

TallD,

In Spain, they have recourse mortgage lending, which means that if you do not pay the mortgage, and the bank sells, and there is a deficiency, you are on the hook for the difference–for life.

TallDave May 29, 2012 at 1:22 pm

That’s true of most states here in the U.S. too. The ways out are bankruptcy or negotiated settlement.

I do not believe mortgage debt is non-dischargeable in bankruptcy in any OECD country.

Matthew C. May 29, 2012 at 2:29 pm

No, we only have (retroactively!) non-dischargeable debt (aka debt peonage) for student loans.

Bill May 29, 2012 at 3:14 pm

TallD,

What country are you talking about??????

Here are the facts:

“Each non-recourse state has its own anti-deficiency statutes that prohibit lenders from seeking judgments. In a few cases, anti-deficiency statues do allow lenders to collect a limited amount of money from the borrower (such as the difference between the debt and the fair market value of the property).
Note that in some states (such as California) non-recourse laws apply only to “purchase money” loans (i.e. original home loans that are used to purchase property). Almost all HELOCs and home equity loans are considered recourse loans and lenders for these loans may sue borrowers to recoup loss. (Except in some cases where the second mortgage lender forces the foreclosure. See: HELOC Foreclosures). There has been some speculation that mortgage refinances do not constitute “purchase money” loans. However, there have been no cases to determine this issue one way or the other.

Anti-Deficiency / Non-Recourse States
Alaska
Arizona
California
Connecticut
Florida
Idaho
Minnesota
North Carolina
North Dakota
Texas
Utah
Washington

One Action States
In some states, lenders are only permitted a single lawsuit to collect mortgage debt. This plays out differently depending on the state’s laws. In New York, for example, a lender must choose between the actions of foreclosing on the property or suing to collect the debt. The following states have some type of one action statute:

California
Idaho
Montana
Nevada
New York
Utah”

Deficiencies, by the way, ARE dischargeable in bankruptcy in those states which have recourse laws.

TallDave May 29, 2012 at 3:21 pm

Bill — I’m not sure you understand that your information supports what I said, i.e. most U.S. states are recourse states. You listed 12 non-recourse states and 6 one-action states; there are 50 states in the U.S.

TallDave May 29, 2012 at 6:55 pm

Matt — And from teenagers, no less. If any other industry in this country was doing what education is, there would be talk of jail time.

Bill May 29, 2012 at 8:46 pm

TallD,

When you were a child, and they asked what percentage of the population was in each state, did you divide by the number of states, or look at the population in each state for the answer.

I guess you counted states and not population.

TallDave May 30, 2012 at 10:53 am

Which part of “most states” confused you, Bill?

Also, I suspect even your shifted goalposts are wrong in terms of the 38 non-recourse states.

VandalsStoleMyHandle May 29, 2012 at 6:52 am

C) It will mean-revert after overshooting to the downside.

“disappearance of quality collateral, and the de-europeanisation of the capital markets” sounds like buzzword bingo, an FT Alphaville specialty.

Millian May 29, 2012 at 7:01 am

“B: Spain is in a self-cannibalizing downward spiral, as Greece was and is. It will not end until there is, at the bottom, an absolute and total crash.” … “Note that a sufficiently large bailout plan, starting with debt forgiveness and reflation, could convert B to A, but right now we are in B.”

What a cop-out. Either it can only end with a crash or it can end without a crash. You can’t say both. (This is before we even address the definition of “an absolute and total crash”. I think that a return to 1999 living standards would not quite count, unless you also believe that Ireland has already had 90% of “an absolute and total crash”, which I don’t think you would accept.)

Andrew' May 29, 2012 at 7:53 am

Lois Lane to Superman “You’ve got me? Who’s got you?!”

Greego May 31, 2012 at 2:59 am

+1

Bill May 29, 2012 at 8:32 am

I have been to both Spain, Portugal and Ireland in the last year, and Spain is potentially the most risky: beneath the veneer of appearance, great uncertainty; beneath the reverance to the “big man”, the man with business connections and influence, the recognition of the hollow core.

How can an economy built on a housing bubble–where people own two house, saw their real estate prices rise–who imported labor to build even more houses, to house the builders and the German/British invaders–expect to continue? Is a work force of construction contractors, real estate agents, bank managers and clerks, a sustainable economy?

It is, only if you can borrow on your real estate holdings.

Robert May 29, 2012 at 9:17 am

This, too, is the economy of Florida!

msgkings May 29, 2012 at 10:56 am

True but Florida is part of a nation, Spain is one.

The Anti-Gnostic May 30, 2012 at 12:56 pm

And Spain is part of the EU, is it not? All for one,…

I’m really enjoying this, because I am frequently and vehemently told how Europe is where all the most intelligent, refined, prudent and compassionate people live in constituent nations with wise and just tax structures, generous social safety nets, diverse populations, and sage mandarin classes to govern them all. Nothing can go wrong in Europe. If only the US were more like Europe. Anybody who thinks that Europe has made ludicrous public obligations behind a US defense umbrella which far outstrip the ability of her current and future tax base to pay is just a stupid, xenophobic bigot.

Dave C. June 5, 2012 at 1:23 pm

EXACTLY.

Don’t forget too: Europe also has trains. . .

Patrick May 29, 2012 at 8:34 am

Hi Tyler

This is an interesting post questioning where Spain stands. You and your readers should factor into your analysis the latest data from Spain.This is her retail sales numbers.

“What is the underlying index?

At this point you may be fearing the worst for this and you would be right to do so. The real level of retail sales has fallen to 75.7 where 2005 is 100. That is a depression type number and exactly what I feared back in January. Even if you put the inflation back in you only get the underlying index back to 91! So even nominal retail sales have fallen below 2005 levels.

I have taken a look at the back data to see where we stand and there are a few months in late 2000 and early 2001 where underlying retail sales we around 75. So more than a “lost decade” is in evidence here.”

http://www.mindfulmoney.co.uk/wp/shaun-richards/spains-underlying-retail-sales-are-now-worse-than-those-of-greece-meaning-she-has-entered-a-depression-now/

Even worse than that the underlying numbers are worse than those for Greece…..

Woj May 29, 2012 at 9:20 am

I also favor B3, but believe the end game may still take a couple years to play out. European politicians don’t seem ready to accept B3 yet, hence the continued half-measures. It seems likely that more partial defaults and bank bailouts will occur in the near term. This will alleviate pressure for large scale operations (and help stock markets) but do little for the actual economies.

James Surowiecki’s recent article on “THE FAIRNESS TRAP” also possesses an interesting dilemma for European politicians. He suggests that even if an economic solution were available that made the whole of Europe better off, most individuals will only favor the policy if it fits their view of fair (which is highly unlikely).

http://bubblesandbusts.blogspot.com/2012/05/eu-resolution-may-hinder-on-fairness.html

Kevin May 29, 2012 at 9:41 am

Doesn’t B3 imply that there is a set of EU and national policies which would allow these economies to right themselves while staying in the Eurozone? If so, put me down for B4: the problems of multiple equilibria are so serious the Eurozone is doomed; peripheral economies won’t have the tools to solve their problems until they leave the common currency; by the time this is over “peripheral” might include Italy and even France. All of which is bad news for everyone.

Sean Brown May 29, 2012 at 10:24 am

Employment (registered full + part-time) is just 44.1% of the working-age population. In the U.S. we are at 55.5% according to my calculation (58.4% according to the BLS which I think excludes some people) and Germany is at 58.6%. I know there is a sizable “shadow jobs” economy but still, the number of government-registered jobs is down from 19.43m at the seasonally-adj. peak in early 2008 to 16.96m today. That’s a 13% decline. I have been saying for over 2 years that Spain is in a depression; seems like people are finally listening. It’s not a Great Depression yet – nonfarm employment was down by 34% in the U.S. – but it’s still a major drop. Additionally, real retail sales (volumes) are down 22.5% from the 2007 peak and back to 1999 levels already. Again it’s not as bad as the ~1/3 drop in U.S. retail sales during the Great Depression (yet). Still we are getting to the point where the Great Depression is the most compelling barometer, especially the headline 24.44% Q1 unemployment rate.

Also, Tyler didn’t mention it but housing still has a ways to drop. There are estimates of We haven’t seen significant residential defaults/firesales yet as banks have either been delaying foreclosure or not selling after foreclosure. Not many people have defaulted on mortgages – the rate is only 2.8% – due to very strict recourse laws that feature a wage-garnishment system much more punitive than in, say, Australia or Canada. (The price at which the bank “buys” the property in foreclosure has recently been raised from 50% of purchase price to 60%, though. If this law keeps getting changed, it will be a backdoor to retroactive non-recourse.) There are crazy but well-sourced estimates of 20-30% of total housing sitting vacant, today – look up “Borja Mateo” online if you can read Spanish and/or read his book. The amount of EUR that was misallocated into buying land and building apartments – maybe a trillion euros all told, you can find it on the Bank of Spain website if you add up retail mortgages, developer loans, and construction loans – amounts to significant capital destruction.

Another reason the residential mortgages are a sitting time bomb is that they are all based on a spread over EURIBOR, resetting once/year. Also, banks are screwed due to this if their funding gets significantly more expensive than EURIBOR, and remember customer deposits are only 62% of total bank funding there (and this number is from June 2011 and includes significant yield-seeking foreign depositors).

TallDave May 29, 2012 at 10:35 am

I think B1 can’t be completely ruled out until someone actually tries significant spending cuts. I think in that case you could get a sharp recession followed by recovery, similar to U.S. circa 1946. It’s not like there aren’t levels of spending at which these countries could be solvent.

B2 seems to rest on the assumption production is not especially relevant to how much consumption they can sustain. We are not as wealthy or productive as we thought we were. Another debt bubble probably isn’t the answer to the problems created by the last debt bubble.

B3… I remember reading about Spanish solar arrays which actually had diesel engines supplying most of the power, which was then sold at the inflated solar prices.

mrmandias May 29, 2012 at 12:51 pm

I think B1 is probably true, but the needed changes are politically impossible in this and every other Western nation (except, apparently, Canada). So B3.

TallDave May 29, 2012 at 1:25 pm

True. OTOH, the great thing about “politically impossible” is that it’s only true until suddenly it isn’t. For instance, Sweden’s early 1990s reforms were probably seen as politically impossible until their crisis.

mrmandias May 30, 2012 at 3:27 pm

Which doesn’t do much good if you’re trying to avoid the crisis.

Millian May 29, 2012 at 1:50 pm

Canada told the provincial governments to do more things that the federal government would no longer pay for. Not really relevant to most European countries (the Spanish regions are already screwed with huge debts).

jdm May 29, 2012 at 10:52 am

“It will not end until there is, at the bottom, an absolute and total crash.”

end, bottom, absolute, total, crash.

All of these words, in this context, are so vague and metaphorical that the sentence is literally meaningless.

claudio May 29, 2012 at 11:05 am

Yes, Spain is too big to bail out. But its banks are not (yet), and they are the main problem. So, why not to help them before Spain becomes a very big Ireland?

TallDave May 29, 2012 at 12:00 pm

I don’t know why people think the banks are the main problem in Spain. The bad bank debts are maybe $100B – $200B. Spain’s annual fiscal deficit is ~ $50B, and their total debt is about $2.2T.

The death blow for Spain is those higher gov’t borrowing costs on their fiscal debt.

The Germans are going to face some very tough decisions very soon.

claudio May 29, 2012 at 5:03 pm

But the borrowing costs come from not knowing how much in debt the Government will be. And it is not possible to know it because nobody knows how much money the banks will need. The most oprimistic figures would easily double the expected budget deficit, but everybody knows that it will be much more.

TallDave May 29, 2012 at 6:58 pm

Sure, but they won’t incur that cost cost every year. And while it moves their debt from $2.2T to $2.4T, that’s not a huge change. Markets are much more concerned that the fiscal picture suggests Spain may default on their loans.

claudio May 30, 2012 at 6:45 am

Bailing out all the bankrupt banks could take the expected 5.4% debt to, at the very best, 8 or 9%, maybe 15 to 20. Spain is (or was?) a sovent country, but it may become insolvent because of the cost of the debt, not the other way around. Since the spanish government has decided to bail out the banks (too big to fall and all that), only foreign help for the banks can prevent it from becoming a very big Ireland. This is still possible. Later, any chance of baling out the country will not be doable.

You must consider that, when the financial crisis started, there was not a single euro in toxic actives in Spain. First, because it was forbidden, and second, the banks couldn’t care less: they were too busy with their own made toxic avtives: loans to the real state market, that went from being the 15% of the GIP to zero. Today, all the banks have debts and own real state coming from this, and nobody knows their value, mainly because there isn’t any market at all. So, since nobody knows wich banks are bankrupt and by how much, nobody trust any of them and the credit system is blocked. That is the root of the spanish crisis: the state has compromise itself to bail out the banks but nobody knows how much money that means. The debt problem comes after this, since it is very diffcult to get money in that situation.

TallDave May 30, 2012 at 10:56 am

The debt is not 5.4%, that’s the deficit. It’s not appropriate to compare ongoing annual figures to one-off events.

Spain’s fiscal solvency is in question with or without the bailouts. Obviously if they had a large primary surplus (aside from the bailouts) they would be fine.

Lord May 29, 2012 at 11:54 am

I agree with B3. Creditors are in control, of both banks and governments and will never willingly relinquish their claims and will always believe there is more to be had. My prediction is none of these countries will go willingly but will be forced out and even after that will cling to euros for as long as possible. Debts and lending will be frozen, and their economies will revert to a cash basis. Only when the core feels the pain will they be forced to liquidate their loans.

ThomasH May 29, 2012 at 11:55 am

B2 but will the ECB act?

ChargerCarl May 31, 2012 at 4:36 am

This x1000

E. Barandiaran May 29, 2012 at 12:14 pm

At the very end of his long post, Tyler says
“For Spain, if a truly major bailout does not arrive,”

As most economists trained in the U.S. and Europe, Tyler wants a bailout funded by “other people’s money”. Who are these other people? Well, it’s better not to discuss this issue seriously because then you have to assume or conclude that they are idiots –yes, there are many idiots in the world but few are idiot enough to bail out rich people from their own stupidity. These economists are very disappointed (the well known XSiM is the best example in the case of Spain) because politicians –the fraudulent clowns that specialize in collecting and redistributing other people’s money– cannot find enough idiots. The economists don’t realize how hard politicians are trying to do it –from Obama to Rajoy to even Cristina in Argentina despite the boom (my dear friend Piñera has money and he has embarked in an endless redistribution of income to fight Chile’s poverty, but don’t bet on his success).

The failure to collect other people’s money has aggravated the Spanish crisis to levels that none could have anticipated even last Summer (the incompetent and corrupt Rodriguez Zapatero wasted years imploring the Germans to invade his country, and now the incompetent and corrupt Rajoy wants to show the Germans that he is meeting their conditions for a bailout –sorry, Marianito, too little, too late). While most American and European economists continue pressing politicians for bailouts, they blame Jesus Christ and Delors for loving Europeans too much –to the point of encouraging them to live together forever in a Great Union of Welfare States– but without paying attention to the institutional details. They urge politicians to settle quickly for a Fiscal Union that would allow to milk German cows for the benefits of poor Greeks, Spaniards, Italians. Yes, I can smell BS even from the end of the world.

It’s time for economists and politicians to look at how to repair the damage of their wishful thinking of the past four years. Once you accept that Santa will not come to help you, you have to stand up by yourself. Unfortunately the crisis has shown how divided each country is –both on what parts of the welfare state must be saved and on how to contain and allocate the losses within each country. Those two are the biggest conflicts, but there are others, and politicians know that without money and without a big carrot to motivate nationals to contribute something, it will be difficult to solve them. Indeed, the political institutions of constitutional democracy are not strong enough for the two largest parties to agree on significant issues –parties are to gain and maintain power not to agree on fundamental issues. How can economists help? By focusing on the containment and allocation of losses because this problem is the one that may lead to rebellion against the two main parties. So, Tyler, stop searching for idiots and focus on how to deal with the losses associated with contract and legal obligations.

Wu Ming May 29, 2012 at 2:32 pm

I don’t think Tyler to be willing for a bailout for Spain, neither Xavier Sala i Martin. This is point of view coul fit more with Paul Krugman. XSiM is libertarian, he can’t support politicians pick-pocketing money from citizens to resolve the state and enterprise errors.

E. Barandiaran May 29, 2012 at 4:44 pm

You should read points 4, 5, 6, 7, 24 and 25 of XSiM’s 25 points. It’s quite clear that he wants Europe to bail Spain out.

With respect to Tyler, well you can read a trillion times his post and get no conclusion (he is often inclined not to commit himself clearly with a position). I read the sentence I quote at the beginning of my comment (read the full sentence in his post) as if he were saying that in the absence of a bailout, the situation would be terrible –so terrible that he’d not be able to enjoy Basque restaurants anymore (btw, my ancestors are Basque). And yes he does not address the question of who will bail out Spain but only foreigners can do it.

Nyongesa May 29, 2012 at 6:38 pm

I personally think it’s a great sign of strength to lay out various scenarios, and not “commit” to a position. For one it’s a tacit admission of the fact he only has a partial grasp of an very complex topic, which is the 100% reality for all actors, participants and observers of this crises. The only truism I can gauge from reading your and thousands of other post on then internet, is that a sorely missing self reflection is uncertainty.

Maybe a probability tree attached to the scenarios would help, with the highest getting the go ahead.

Steven Kopits May 29, 2012 at 2:35 pm

I personally think Spain will end like Greece, and fairly soon. A Grexit looks imminent–but I believe it will turn out much better than people are thinking, because the Greek economy is already so depressed.

With that example (assuming the world hasn’t fallen apart), the Spainards and Portuguese will be encouraged to depart, devalue and default as well, as this represents the most–and maybe only–workable strategy.

mark May 29, 2012 at 12:23 pm

Very clearly B. What they need to do / will ultimately be forced to do, through one mechanism or another, is wipe out over $1T in private sector debts (including both financial and nonfinancial insitutions). The sad thing is they don’t have a chapter 11 like we do where the debts could be equitized and the capital structure merely shifted, with the businesses maintained as going concerns. Instead, there will have to be sales to foreign investors / sovereign capital injections / or just plain writedowns to create equity where none now exists.

Merijn Knibbe May 29, 2012 at 1:24 pm

Is this A, or B? The long term development of spanish retail sales.

http://rwer.wordpress.com/2012/05/29/graph-of-the-day-how-to-spell-austeridad/

TallDave May 29, 2012 at 1:32 pm

Now contrast this to de Rugy’s chart of gov’t spending, and you are forced to conclude that Spanish citizens are cutting spending, while the Spanish government is largely not.

CPV May 29, 2012 at 1:35 pm

I was in Madrid a month ago. It does not feel like it is falling part yet. Get down to La Latina (or Mercado San Miguel) and enjoy some Jamon.

Ed May 29, 2012 at 1:51 pm

Some earlier commentators have asked what a collapse in Spain would look like. Try this:

http://22billionenergyslaves.blogspot.com/2012/01/interlude-in-andalucia.html

Wu Ming May 29, 2012 at 2:44 pm

Inside Spain opinion: B3

Our country should not be bailout, no one should ever; it only promotes bad resource allocation and bad investment, the root causes of the current global and local crisis.

Maybe our country should return to an economical age of 1999 (+facebook) or to 1963; reboot and restart, it will be very hard for the spanish welfare and paternalist statism accustomed citizens.

Charg May 31, 2012 at 4:37 am

Is proper monetary policy a bailout? I don’t think it is, it’s just good policy.

Glenn Mercer May 29, 2012 at 3:57 pm

Okay, I gotta say two things about this phrase:

“…the best bet is to expect Spain to revert to something, in economic terms, resembling 1999 + Facebook.”

1. I think it is absolutely hilarious!

2. I am not quite sure what it means, though I think I get the drift.

Any help here?

TallDave May 29, 2012 at 4:35 pm

I think he means 1999 PPP GDP per capita, but with the (largely unmeasured) benefits of 2012 social media.

Nyongesa May 29, 2012 at 7:23 pm

Thanks Tall, I too was wondering, but felt compelled by group pressure to pretend I understood it.

Barkley Rosser May 29, 2012 at 5:34 pm

As someone who has been in Spain more than once in the past year, I lean to CPV, and will go further to say that I think the chance for A is much higher than anybody on this thread has come out and said so far, even though the employment situation in Spain is awful, atlhough that has been true for an extended period of time now, predating the recent Great Recession.

OTOH, if it is B, then I also go with B3, but that needs some parsing. Some have gotten at it, Tyler most closely, while others have simply missed the banana here. The political economy problem is at least partly the high autonomy combined with lack of responsibility of the regions, with the recent news of supposedly successful Catalunya being broke. The problem of the banks has been mostly due to regional cajas that got overly involved in the extrem housing bubble, with currently troubled Bankia having gobbled up a bunch of that junk. The problem of the cajas is tied to the problem of the regions, and this could lead to the downward spiral and several possible political economic restructurings, aka multiple equilibria outcomes.

BTW, the largest bank in Spain is also the largest in Europe, and is so far not in too bad shape, Banco Santander, although that is largely due to it having so much of its business abroad, about half of it in Latin America.

TallDave May 29, 2012 at 7:01 pm

You know things have gone topsy-turvy when Latin America is a bastion of economic safety.

mark May 30, 2012 at 11:08 am

WIth the Argentinian and Bolivian exprops of Spanish investments the past two months, not so much.

TallDave May 30, 2012 at 1:44 pm

Interesting, I hadn’t heard about that.

derek May 29, 2012 at 9:44 pm

A bit more complicated than that. The provinces had in many cases already gone through gut wrenching fiscal reforms. 1983 in BC, 1984 in Alberta. Made Wisconsin seem like nothing. So by the time the Federal gov’t was ready to balance the books, they had most provincial jurisdictions in pretty good shape. One of the big number cuts by the feds was health transfers.

For the current situation there is no comfort. Start today and in a decade you might have a handle on things, then another 5 years or so for the economy to adjust. Throw in a strong tail wins of decreasing interest rates, worldwide growth an increasing commodity prices.

There is a reason why that type of action is unpalatable. Unfortunately I don’t see an alternative. Canada had its own currency, depreciated somewhat but not enough to make foreign debt impossible. Therecwas a banking problem as well in the early ’90s.

Ed Snyder June 5, 2012 at 12:59 pm

“I can’t say I like your chances, but… you have my sympathies.” :)
–Alien (1979)

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