Madrid: It has become Spain’s version of Godot: waiting for Rajoy. For various reasons, Mariano Rajoy, the country’s prime minister, has deferred seeking help from a financial assistance programme that Europe has tailored to Spain’s needs. Many economists, analysts and business executives here are increasingly worried about the costs of further delay.
They warn that waiting to seek aid, and the uncertainty the delay engenders, threaten to push the economy deeper into recession. And that, they say, could increase the ultimate cost to Spain and Europe if the aid eventually needs to be granted under crisis conditions.
As long as Spain’s borrowing costs remain below six per cent, as they have since the European Central Bank said it would buy the country’s bonds if asked, the Rajoy government might seem to have no reason to rush. But the downgrade of Spanish debt to near junk status last week by Standard & Poor’s underscored the fragility of the country’s finances. And the seeming political paralysis in Madrid may be reinforcing a wider economic stasis.
“The economy has stopped,” said Angel Berges, the chief executive of AFI, an economic consulting firm based in Madrid.
The indicators are grim: Cement production has reached its lowest level since the 1960s. Car sales are down 37 per cent from last year. And on weekdays the public squares of Madrid are filled with the unemployed - young and old - whiling away the hours.
Even the wealthy are feeling the strain. In the boat slips of Barcelona, “For Sale” signs hang on nearly every moored yacht.
The bond-buying programme that the central bank announced in early September is meant to help keep a lid on the borrowing costs of besieged countries like Spain, if they ask for the help. Under the plan, the big new European bailout fund, whose financial firepower is to eventually reach 500 billion euros, or $648 billion, would buy newly issued Spanish bonds directly in the government’s auctions, while the central bank would stand ready to buy existing bonds in the secondary market.
Analysts said there was more at stake than the yield on Spain’s government bonds. They pointed out that those lower interest rates would lead to reduced borrowing rates across the board, providing a cheaper source of financing for Spanish banks and corporations that could stimulate investment.
And yet Rajoy’s reluctance to seek help has its own logic. To begin with, German officials have urged him to wait, as they have no desire to present yet another Eurozone rescue package to their fed-up voters.
But Rajoy, a stolid, cautious man, has plenty of domestic reasons, too. Since coming to power in late 2011, his popularity has plummeted in the wake of a series of wrenching austerity programmes. Now, with regional elections on Sunday in his home state of Galicia that could test the strength of his centre-right Popular Party, Rajoy has every incentive to wait a bit longer to request help from Europe, which would bring with it further outside oversight of the Spanish budget.
“There is no pressure on us - we will take the decision when we know everything we need to know,” said a senior government spokeswoman in Madrid, who declined to be identified by name as a matter of policy.
But analysts said that by waiting several more months, as many here predict will happen, Rajoy was playing a dangerous game. Not only will the economy continue to suffer from uncertainty, but Rajoy also runs the risk of being forced to seek help under the duress of a market panic, if bond investors once again begin to bet against Spain. Europe’s intervention under that circumstance could lead it to demand even harsher policy measures - like the socially disruptive cuts in Spanish pensions that so far Rajoy has avoided.
“If you wait too long, you will be forced into a programme that will have much tougher conditions - so better to ask for it now,” said Jose Manuel Campa, who was secretary of state for the economy during the previous government and is now a professor at the IESE Business School at the University of Navarra in Madrid.
In terms of national debt, Spain is nowhere as bad off as nearly bankrupt Greece, whose debt burden is nearly 200 per cent of the size of its economy. In Spain’s case, the number is 90 per cent - the same as France’s.
The main worry is not the size of the debt, though, but how quickly it has been amassed. By next year, when it is expected to rise to 96 per cent, Spain’s debt burden will have grown by nearly one-third since 2011, according to the International Monetary Fund. That rate of debt expansion outpaces every other country in the world and is the result of a plummeting economy, high interest rates and the burden of rescuing Spain’s collapsing banks.
One of the concerns S&P raised in its downgrade last week was that the austerity measures already adopted by Spain were choking off economic growth.
Consider the auto industry. Hard hit by the recession, it now sells about the same number of cars - projected to be about 700,000 this year - that it did in the 1990s. At the industry’s peak volume, in 2006, Spaniards purchased 1.6 million vehicles.
Further curbing demand is the recent increase in Spain’s value-added tax, essentially a sales tax. It is now 21 per cent, up from 18 per cent, and it helped send Spanish car sales plunging by 38 per cent in September, the first month of the higher tax.
“We are worried about the market because sales are so dependent on the economy,” Juan Antonio Sanchez Torres, the president of Ganvam, the Spanish car retailers’ association. “The recent VAT tax increase raised the cost of a car by 650 euros on average. That has an important psychological impact that can stop consumption.”
Downward pressure on wages in both the public and private sector has helped the economy by making Spanish exports, like machinery parts and chemicals, more competitive. But the Spanish economy is largely driven by domestic demand, and there are few signs that will pick up any time soon.
Bank loans have virtually dried up. Compared with 2006 and 2007, when bank lending grew at about 25 per cent each year, the evaporation of credit has had a devastating effect on consumers and corporations alike.
Analysts at AFI, the Spanish financial consultancy, said they did not expect the country’s banks - many of them still trying to dig themselves out from a mountain of bad real estate loans - to resume lending in a measurable way until 2014 at the earliest. All the more reason, they said, for Spain to seek help quickly.
Adding to the potential costs of delay, it seems nearly certain that the government will miss the deficit-cutting targets for this year and next that are part of its Eurozone obligations. That raises the prospect that Madrid will be forced to submit to even tougher budgetary strictures if it waits until later to qualify for the bond-buying support.
“The government will have to take additional measures to reach the 6.3 per cent of GDP target,” its goal for 2012, said Federico Steinberg, an economist at the Real Instituto Elcano, a research group. “They will need to freeze pensions or even reduce them.”
Pensions take up about 100 billion euros of Spain’s 350 billion euros in annual spending, Steinberg said. But they have been one area that has been spared budget cuts; in fact, they recently were increased by one per cent.
Because many pensioners are now the sole bread winners of their families, any cutbacks in retirement payments would carry a devastating social cost. Rajoy’s critics said it would be better to not risk such an outcome by waiting to ask for aid.
In Madrid, it is jokingly said that if you meet a Galician on the stairs, you won’t know if he is going up or down.
Rajoy’s ambivalence about seeking Europe’s help might be partly explained by his Galician roots, say those who tell the joke. But as they wonder whether Spain is heading back up, or farther down, few are laughing.
