Spain’s prime minister, Mariano Rajoy, has finally admitted three things I have been saying for a long time
- Spain’s regions were in deep fiscal trouble if not bankrupt
- Spain could not possibly hit its deficit targets for 2012
- It is mathematically impossible for Spain to meet deficit goals without raising taxes, no matter how much he insisted otherwise.
The truth (at least partial truth) is out today with an announcement from Rajoy regarding a major tax hike, and an announcement from the budget minister regarding “serious budget shortfalls in its 17 autonomous regions, which have spent recklessly in the past decade.”
The budget deficit target is 6%, but the Prime Minister says it will “unexpectedly” be 8% so further austerity measures will be needed.
The New York Times reports Spending by Regions Makes Spain’s Fiscal Picture Worse
Facing a wider then expected budget deficit, Spain’s new government announced a $19.3 billion package of tax hikes and spending cuts Friday and admitted the picture was likely even worse than it appeared because of overspending by the country’s autonomous regions.
The new budget minister, Cristóbal Montoro, made clear Friday: serious budget shortfalls in its 17 autonomous regions, which have spent recklessly in the past decade.
The Bank of Spain announced this month that regional debt had surged 22 percent, to $176 billion in September from $144 billion the year before. And some experts say that there remain tens of billions of dollars in “hidden” regional debt yet to be discovered.
That “hidden debt,” most of it in unpaid bills, is not included in Spain’s total national indebtedness of $915 billion. That could easily amount to $25 billion to $40 billion more, experts say.
Hidden Debt and Regional Problems
I have talked about hidden debt, hidden losses, hidden deficits, and various regional problems many times. Here is a sampling:
- December 22, 2011: Spanish Implosion Coming Up; Deficit Up, Receipts Down, a Need to Cut 40 Billion in Expenses from 90 Billion; Spain’s “Hidden Deficit”
- December 17, 2011: Home Prices in Spain Drop 14 Consecutive Quarters; Banks Stuck with Major Losses Not Marked to Market; Expect Conditions to Worsen
- September 22, 2011: Hidden Losses, Lack of Liquidity at Spanish Banks; No Bidders for State Owned CAM
- September 16, 2011: Navarra Region of Spain Bankrupt by End of Year “No Money to Pay Workers or Provide Services”; Electricity cut off to Spanish town over unpaid bills
Cockroaches and the Theory of the Unexpected
Mariano Rajoy says this news is “unexpected”. It cannot possibly be. I have been talking about these problems for many months. The admission by Rajoy simply means the problem is so bad that Spain can no longer hide all of the cockroaches.
The cockroach theory says that when you see one cockroach there are at least a hundred more. In this case, we see dozens of cockroaches openly scurrying about.
I suggest the problems are still far bigger than reported and the economic situation will get much worse.
Problems to Get Much Worse
Major tax hikes in the midst of a serious recession, with unemployment rate at 22.8% (and rising) makes no economic sense. Yet that is exactly the medicine prescribed by the EMU and agreed to by Rajoy.
Spain will find it impossible to meet its deficit target even after these hikes because of the resultant drop in economic activity.
Italy, Portugal, and Greece are in the same boat. And with all these slowdowns, precisely who is Germany going to export its products to?
Mike “Mish” Shedlock
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