It should be obvious to anyone reading this blog that Spain is in an economic depression as well as bankrupt. It is equally obviously that eurozone imbalances and a flawed treaty are to blame.
Finding mainstream organizations willing to admit Spain is bankrupt is another matter. Yet today, Jeremey Warner writing for The Telegraph says just that.
I’d not noticed this until someone drew my attention to it, but the latest IMF Fiscal Monitor, published last month, comes about as close to declaring Spain insolvent as you are ever likely to see in official analysis of this sort. Of course, it doesn’t actually say this outright. The IMF is far too diplomatic for such language. But that’s the plain meaning of its latest forecasts, which at last have an air of realism about them, rather than being the usual dose of wishful thinking.
Let’s take the projected budget deficit first. This is expected to decline quite steeply this year to 6.6 per cent of GDP, but that’s mainly because the cost of bailing out the banking sector fell substantially on last year’s budget. On a like-for-like basis, there has in fact been very little fall in the underlying deficit. And nor on the present policy mix is there ever likely to be, for that’s where the deficit is projected to remain until the end of the IMF’s forecasting horizon in 2018.
Next year, the deficit is expected to be 6.9 per cent, the year after 6.6 per cent, and so on with very little further progress thereafter. Remember, all these projections are made on the basis of everything we know about policy so far, so they take account of the latest package of austerity measures announced by the Spanish Government.
The situation looks even worse on a cyclically adjusted basis. What is sometimes called the “structural deficit”, or the bit of government borrowing that doesn’t go away even after the economy returns to growth (if indeed it ever does), actually deteriorates from an expected 4.2 per cent of GDP this year to 5.7 per cent in 2018. By 2018, Spain has far and away the worst structural deficit of any advanced economy, including other such well known fiscal basket cases as the UK and the US.
So what happens when you carry on borrowing at that sort of rate, year in, year out? Your overall indebtedness rockets, of course, and that’s what’s going to happen to Spain, where general government gross debt is forecast to rise from 84.1 per cent of GDP last year to 110.6 per cent in 2018. No other advanced economy has such a dramatically worsening outlook. And the tragedy of it all is that Spain is actually making relatively good progress in addressing the “primary balance”, that’s the deficit before debt servicing costs.
I don’t advise getting your money out lightly. Indeed, such advise is generally thought grossly irresponsible, for it risks inducing a self reinforcing panic. Yet looking at the IMF projections, it’s the only rational thing to do.
Inquiring minds with time on their hands may wish to slog through the 93 page IMF World Economic Financial Survey, Fiscal Adjustment in an Uncertain World that Jeremey Warner mentioned in his article.
Mike “Mish” Shedlock