Monday, May 3, 2010


After hinting at summer last week, the weather took a bit of a turn for the worse right around the time Standard & Poors downgraded Spain's credit rating. This news was followed by unemployment reaching twenty percent and the forecast this week calls for rain so the outlook isn't too sunny right now.

The recent spat of bad economic news was followed by some thoughtful articles highlighting the differences between the Spanish situation and Greece in terms of government debt, pointing out that even while downgrading the country, S & P found little chance of Spain going into default.  This is, of course, great news, but it doesn't mean it's hunky dory since public debt is only part of the equation.

Sources: Bloomberg, IMF, European Union Commission Estimates

As the data shows and the related article explains, Spain's problem isn't so much its public debt percentage, which is actually lower than Germany's, but its current account balance, which is a combination of public and private debt. The latter was used primarily to fund the real estate bubble  and when it popped, there's been nothing to replace it other than government spending because the economy's been nothing but construction and tourism the last twenty years.

So the one bright spot, its public debt, is increasing as a result of the crisis. At the same time, private sector debt, mostly tied up in mortgages, is increasing due to the housing crash. Meanwhile, the international community is calling for a period of wage deflation as prices continue to rise. Growth isn't projected until 2011 and even then it'll be anemic, which means there's little hope of the unemployment situation turning around anytime soon despite what the Spanish president says. That's the best case scenario.

One of the tragic ironies is, just when Spain has found a way to harness its famous sun for something other than tourism and become a player in the emerging renewable energy market, the subsidies needed to help nascent groups like T-Solar might be cut in the name of austerity. It makes me wonder if there had been less building and more investing where the country would be now.  Of course, I've never understood why a French company, Alstom, won the contract to build the trains for the Barcelona metro either. Sometimes is seems the only thing Spanish are the banks and their empty buildings anymore. Actually, that's not true; there's the chiringuito once the clouds pass and summer finally arrives.


  1. I feel so bad for Spain that it's having such a tough time right now, particularly with unemployment, which always brings with it a host of other problems. The New York Times has been following the European economic crisis closely and this morning published an article about how the upcoming Spanish election(s) is affecting the gov't's efforts to manage its problems. Unfortunately, it looks like nothing new is on the horizon. Europe is in trouble. All quite scary.

  2. Hey Michele. Yeah and sad, although when I read about the states I feel the same thing. Must be global. Too bad I get island fever otherwise I'd move to Fiji. Then you got global warming. Best to not read the news I guess. At least summer's almost here!