Saturday, October 27, 2012

Spanish Unemployment at 25% ... And the Spanish Government Can't Do Anything About It

Spain is a special basket case in the European economies. It's spending 4% of GDP on unemployment benefits, but it has no money and is running out of time to borrow more from its worried creditors.

Its debt load is tremendous, its economy is in shambles, and its safety net is full of holes. As a member of the Euro, it can't unilaterally weaken its currency and enable its exports to  be sold at more attractive and competitive prices in world markets. Amd most important, its home owners and banks are drowning in a sea of mortgate debt which is now greater than the value of the homes it initially financed.

You see, Spain's easy credit asset appreciation induced housing bubble, when it burst, has made the proverbial chickens have all come home to roost. But too much debt is too much debt, whatever the cause. And when the creditors lose patience, all hell breaks lose. That's Spain's situation.

Accordingly, when such asset appreciation bubbles result from speculative debt undertaken in order to produce no tradable goods and services with economic value, disaster is sure to follow. That's exactly what happened to Spain.

{Just google or bing Hyman Minsky or 'Minsky moment' for a detailed explanation of just how this asset appreciation debt induced bubble bursting process works. If you're not already familiar with the Minsky moment process, it's worth taking a few minutes of your time to get up to speed about the perils of debt in relation to asset inflation.}

So as it did here in the U.S., in Spain the housing bubble did indeed burst. As a result, housing prices have fallen dramatically, loan balances remain elevated even though prices have imploded, bank loans have gone bad, home owners and other consumers are now unemployed, and many individuals are "underwater" on their mortgages, if not simply broke. And for that matter, the Spanish government is essentially broke and unable to borrow more to keep paying its unemployment and related benefits to troubled citizens, too. What a mess!

Oh, and by the way, Spain's unemployment rate is 25% and the country is in recession, its borrowing power gone.

Spanish Bad Loans, Jobless Rate Rise tells the sad story:

"MADRID—Two Spanish banks Friday reported big jumps in bad loans and set aside more cash to cover losses on their vast real-estate holdings, while official data showed the jobless rate rose to a record of more than 25%, indicating the nation's recession and financial crisis may be deepening.

Banco Popular Español SA the country's fifth-largest lender, said real-estate losses will mount because local banks are no longer able to refinance loans made to home builders during the last years of Spain's decade long housing boom.

Separately, data from the National Statistics Institute showed that the unemployment rate rose to 25.02% in the third quarter, from 24.63% in the second quarter. Loan default rates tend to move in tandem with unemployment and both have skyrocketed since Spain's housing boom turned to bust in 2008, sending the economy into a tailspin.

Deputy Finance Minister Fernando Jiménez Latorre said the pace of job destruction was slowing in Spain but that unemployment may rise in the near term. "We're still in the painful period of adjustment," Mr. Jimenez said at a news conference. "We are estimating that [the economy] will start to recover in the second half of next year, so as a result it won't be until then that we will see an improved employment trend."

The default rate of real estate developers is "accelerating at a fast pace," partly because some savings banks have stopped refinancing. . . ."


Any way out for Spain? No easy way, that's for sure. No short term answer either. It's stuck with too much debt and no economic growth compounded by the unwillingness of creditors to extend their loans as they mature, let alone agree to make new ones.

To take an example of the impact of a nation's debt burden to no economic growth, government debt to GDP is a common measurement to determine the creditworthiness of a country. In Spain that wasn't an issue until recently since government debt was minimal. The bubble occurred in the housing part of the private sector, and since that's the root cause of Spain's current financial problems, we'll begin there. It's a familiar story by now.

As easy credit generated sales and home prices accelerated, prices rose and more home loans were easily obtained. That caused home prices to accelerate further, which in turn ended up in even more loans for home purchases. Of course, the debt outstanding grew in proportion to the bubble in pricing as the amounts borrowed to buy the homes rose dramatically. Eventually the bubble burst and now home prices have fallen dramatically.

To repeat, the loans outstanding against those home purchases remain at the same level despite the fall in home values. People owe money they can't repay by selling the house at anywhere near the amount borrowed to purchase the asset.

So now the unemployed home owners can't make the required mortgage payments and as a result, bank loans are uncollectible. Banks are going broke, too. It's a vicious circle.

Here's the main message of the Spanish story -- GDP declined as the financial debacle unfolded. Unemployment increased to astronomical levels. Tax receipts fell, and government "stabilization" measures turned into "austerity" measures as the borrowed money to fund unemployment compensation payments and other government transfers of wealth to welfare beneficiaries disappeared.

In simple math, a declining GDP means that for any given level of government debt, the financial position of the government becomes worse.  An economy which doesn't grow as much as it debt and deficits grow is headed for disaster. So Spain has 25% unemployment today, a recessionary economy and virtually no hope for improvement anytime soon.

And that, my friends, is just another reason why Europe is an economic basket case with no end in sight. More government spending won't solve a thing. Only private sector led economic growth can do that.

And not by government subsidies creating or allowing private sector asset bubbles to develop either.

Economies must produce goods and services of value to individuals to enable legitimate and self sustaining economic growth. There are no easy shortcuts or realistic alternatives.

Thanks. Bob.

No comments:

Post a Comment