Tuesday, July 24, 2012

Spain Feels the Pain

Spain teeters on the edge of a steep 'fiscal cliff'

By John W. Schoen

If you want to see what it looks like to be headed off a fiscal cliff, look at Spain. As the U.S. government counts down toward a year-end tax and spending crunch that threatens to throw the economy into reverse, Spanish officials already are desperately scrambling to save their country from economic and financial ruin.

They are also facing a widening political backlash from Spanish voters who are coping with the kind of tax increases and government spending cuts that will take effect in the U.S. unless Congress acts before the end of the year. Last week, tens of thousands of angry Spaniards took to the streets in 80 cities throughout the country to protest the government's latest austerity package.

Fresh from a drawn out, contentious battle with its eurozone neighbors over terms of a massive bank bailout, Madrid is now getting calls from local government officials saying they can no longer pay their bills. Last week, the national government set up an 18-billion euro ($22 billion) emergency fund to backstop those regional governments. Days later, Valencia said it would need to tap the fund, and the Murcia regional government followed suit over the weekend. More regions are expected to call for help, overwhelming the fund. The total debt load isn’t known, but one Spanish newspaper estimates it could be as much as 140 billion euros ($169 billion), some 36 billion ($44 billion) of which has to be refinanced by the end of this year.
Spain’s debt hangover follows an era of cheap credit that the birth of a common currency helped create. When the eurozone economy was booming, investors buying euro-based bonds accepted the same interest rates whether the debt was floated by Germany or by Greece.

In Spain, those lower borrowing costs sparked a housing boom much like the buying and building frenzy unleashed by low rates in the U.S. The result was a windfall, in the form of building permits and fees, for Spain's regional governments. Those governments, in turn, took advantage of cheap credit to embark on their own building sprees, sinking billions of euros into new roads, parks, airports and government buildings to house expanded payrolls of government workers. Now that the property boom has gone bust and the Spanish economy is contracting, the regional governments can’t raise enough revenue to pay the bills and make their debt payments.


With the regions now calling on Madrid for backstops, investors have also begun treating the Spanish government like a subprime borrower. Many potential buyers have fled Spanish bonds; those still willing to lend are charging as much as 7.6 percent interest. That surge in borrowing costs makes Spain’s national debt load even more difficult to manage.

The government’s cash squeeze further raises the likelihood that the Spanish government will be the next in line -- after Greece, Ireland and Portugal -- to call on its eurozone neighbors for a government bailout. But northern eurozone officials, led by Germany, face a political backlash at home if they agree to write unlimited checks to countries with no credible solutions to their debt crises.

That backlash will likely intensify when European officials wrap up their latest review of the ongoing Greek bailout, which has shown little progress in reviving the local economy or reversing Athens’ downward spiral. On Tuesday, three EU officials told Reuters that Athens appears unable to pay what it owes and will need to undertake another debt writedown, a cost that would have to fall on the European Central Bank and eurozone governments. "Greece is hugely off track," one of the officials told Reuters, speaking on condition of anonymity because of the sensitivity of the issue. "The debt-sustainability analysis will be pretty terrible."

That puts Greece further at odds with its bailout benefactors and raises the likelihood that it will be forced out of the currency union. 


“The problem is there isn’t enough in the (eurozone) kitty to bailout the Spain sovereign, its banks and its regions and then have to deal with Italy,” wrote David Rosenberg, Gluskin Shiff chief economist, in a note to clients. “The break of the eurozone is no longer a taboo topic, even at the highest levels of the European Union and International Monetary Fund. “

The longer European officials haggle over a Spanish government bailout, the greater the risk of a wider financial calamity. “These guys are juggling with dynamite sticks,” said Art Cashin, The head of Swiss bank UBS's operations at the NYSE. "If people in any of those countries begin to run on their respective banks, it goes out of the hands of leadership and puts the crisis into the streets. We’re getting very close to that."

The Spanish banking crisis has also brought lending there to a virtual standstill, which has sent the Spanish economy reeling. Businesses that can’t get loans can’t expand and hire new workers. The unemployment rate has surged to 25 percent; among younger workers, roughly half are out of a job.



The economic crisis in Greece is being replayed in Spain, with much more serious potential economic consequences due to the size of the Spanish economy. It is becoming increasingly evident that the European Union is nearing the last days of existence in its present form. The only real questions now are how it will break up and what will succeed it.

Also nearing the last days of existence in its present form is the utopian system of compulsory state ownership of all antiquities and other "cultural treasures." Greece and Italy have already had to confront the reality that they can't afford to pay in the present for what they have supported in the past.

The burden of supporting great numbers of archaeological sites and monuments, museums, storage facilities and their security systems, curatorial and archaeological staffs, and other costs of State ownership of millions of antiquities (nearly all redundant) has become too great for these societies to bear. That actually happened long ago and until now, was concealed by deficit spending.

Meanwhile the U.S. State Department's Cultural Heritage Center continues to issue a seemingly endless succession of agreements to implement import restrictions on antiquities of types claimed by foreign governments such as Italy and Cyprus, regardless of where the objects in question are actually located or the legality of their present ownership. The doctrine of "presumptive origin" under which these restrictions are imposed is very questionable to say the least, and has been challenged in Federal court in cases still pending. These import restrictions, contrary to the clear intent of Congress in originally authorizing US implementation of the 1970 UNESCO Convention, are never allowed to lapse - they are automatically and ritualistically  renewed after each five-year period without anything resembling the objective scrutiny Congress required.

There is something strange and almost surreal in the manner in which this bureaucratic organization, directed by archaeologist Maria Kouroupas, has seemingly become a law unto itself -- apparently able to ignore everything that does not serve its concealed agenda of eventually eliminating private collecting of antiquities by restricting and suppressing the international trade supporting antiquities collecting.

It now seems probable that we shall see whether the Kouroupas regime is also able to ignore the laws of economics.