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Spain on the Brink?

Why Read: Because economic risk in the Eurozone and elsewhere appears to be escalating, and what is said here describes what may prove to be the 'biggest crack yet in Humpty Dumpty's shell'.

Commentary: It was some months ago that I began warning in this Newsletter that Spain was the country watch carefully in the context of its unemployment rates, federal government deficits, GDP and housing problems. At the time Spain didn't seem to be the focus for most commentators that it was, and continues to be, for me.

Yesterday, the 'rubber hit the road', with the 'leaked release' of some of the apparent conditions that will be attached to the agreement reached by Eurozone country finance ministers two weeks ago. These conditions, which are said to include:

  • the takeover of Spain's financial system by the European Union;

  • a write down on 67 billion euros of bank debt to be taken by existing creditors of the banks; and,

  • a wind-down of at least one Spanish bank

are being called 'draconian'. This is likely for no reason other than such extreme measures have not previously been seen until now among Eurozone countries. That said, it seems obvious that 'draconian measures' are called for, not just in Spain, and not just in the Eurozone.

While this was going on, Spanish Premier Maiano Rajoy announced:

  • an increase in Spanish VAT (value added, or sales tax) from 18% to 21% for products (and I assume most services) other than food where Spanish VAT remains at 4%; and,

  • introduced 65 billion euros in austerity programs.

Consider the consequences of these measures, which on the balance of probabilities likely include:

  • near-term reduction in retail sales from current levels. This given Spain's current 24% overall unemployment rate and 52% youth unemployment rate;

  • increases in at least the overall unemployment rate;

  • a drop in Spain's GDP;

  • notwithstanding the austerity measures introduced, a continuing Spanish Federal deficit;

  • absent Spanish currency controls, a run on Spain's banks;

  • a very unhappy 'Main Street' population with a very real chance of demonstrations and 'less than happy' social unrest;

  • reduced tourist revenues if that happens, where tourism is very important to Spain; and,

  • continuation and likely worsening of the current Spanish economic recession.

It typically is not a good thing when a 'small shoe drops'. Spain is a 'big shoe' in Eurozone terms. Watch for:

  • things in Spain to get worse before they get better; and,

  • negative economic related contagion issues flowing out of Spain to other Eurozone countries and possibly the world banking system. Look for signs of this with particular vigilance.

Topical References: Debt crisis: Spain bows to EU ultimatum with drastic cuts, from The Telegraph, Ambrose Evans-Pritchard, July 11, 2012 - reading time 2 minutes; Proud Spain again humbles itself to the euro's demands, from The Telegraph, Jeremy Warner, July 11, 2012 - reading time 3 minutes; 'This is reality': Spain slashes spending, raises taxes in $79B austerity plan, from MSNBC World News, Jeremy Warner, July 11, 2012 - reading time 3 minutes; and, Spain to Cede Bank Control, from The Wall Street Journal, Matina Stevis and Gabriele Steinhauser, July 10, 2012 - reading time 1 minute.


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