Spain's Fiscal Headache Worsens

CNBC and the New York Times are reporting that Spaniards are taking their money out of the country and looking for jobs in other countries, as the situation in Spain deteriorates.
In July, according to CNBC, Spaniards withdrew 75 Billion Euros ($94) from Spanish banks. This is the equivalent of 7% of the national GDP. Spanish officials report that the wealthy have already taken their money out of the country and it is now the middle and working classes which are looking for foreign placements for their savings.
This trend began last year and has continued despite the European Union’s promise to pump 100 Billion Euros into the Spanish government’s accounts to permit it to aid failing regions and banks.
The acceleration in bank withdrawals comes as Andalusia joined the ranks of Spanish semi-autonomous regions announcing that its cash flow is insufficient to meet its current cash needs, i.e., Andalusia doesn’t have enough Euros in its state coffers to pay its bills. This is what is known as a liquidity crisis.
Other Spanish regions with the same problem include Madrid and Catalonia (Barcelona’s region).
The liquidity pinch comes as the Spanish government announced a plan to place 5 Billion Euros in Bankia, one of Spain’s largest mortgage-lending banks, which has lost its capital as a result of the real estate crash in Spain, much like what happened in the United States several years ago to several large American banks and to Fannie Mae and Freddie Mac. Banks which lent large sums to home buyers whose properties are now not worth as much as the mortgage on them are going into default rather than continuing to pay their mortgages.
Workers and managers are now seeking employment in England because they cannot fins jobs in Spain, where the unemployment rate is 25%, the highest in the western world. Last year, some 30,000 Spaniards registered to work in England, and the figure would more than double if Spaniards without papers, i.e., those seeking work in England without registering, were counted.
While Spain’s economy is much more robust than Greece’s, the situation in Spain is very reminiscent of what has happened in Greece over the past three years. The Greek economy seized up as the Greek government could not find sufficient funds (because international lenders stopped buying its bonds) to pay its bills. The deposits in Greek banks have dropped by 30%, and unemployment is at record levels near 20%. The European Union’s continuing bailouts, now amounting to more than 200 Billion Euros, have not helped Greece recover because the austerity program forced on it by the EU as the condition for the bailouts has broken the Greek economy down even further, causing a downward spiralling vicious circle - fewer jobs, fewer social services, higher unemployment, fewer tax revenues, fewer jobs…
Spain appears on the brink of falling into a similar vicious circle, and Spaniards are taking their money and leaving the country just as Greeks who had the opportunity to do so, did.
Spain’s bond market is still functioning, but it is being forced to pay upwards of 6% interest to short term lenders, and long term lenders are disappearing.
Spanish remember the “corralito” in Argentina in 2001 when the Argentine government froze assets in Argentine banks to prevent a flight of capital. A million Argentines are now living and working in Spain, and their horror stories are to some extent feeding the anxieties of Spaniards who see the possibility of a “corralito” in Spain if things get worse.
The EU is trying to work out how to save Spain, because unlike Greece which represents perhaps 1% of the GDP of the EU, Spain is the fourth largest economy in Europe - after Germany, France and Italy. And, with the Greek disaster still page-one news around the world, the EU policymakers should be worried that if Spain’s economy continues to stagnate, the Greek syndrome will make a bailout program for Spain almost impossible, given the size of Spain’s fiscal requirements.
And, Moody’s is sitting in the wings, having announced that it is reducing the outlook for the EU AAA rating to negative and may actually reduce the rating if it decides to lower ratings for Germany, France and Italy, the largest contributors to EU finances.
America should take heed. Moodys has already suggested that another rating drop is possible in 2013, if the deficit and federal budget spiral are not brought under control.
There are no free lunches, dear readers, no matter how much we might like to believe that there are.