Spain’s woes

You’d never know that Spain is one sick puppy of a nation by walking the streets of Barcelona, as I was doing last week. The sidewalks are crowded with well-dressed people, the tapas bars are full, trendy Michelin-starred restaurants are booked months in advance, and the fashionable shops along the Paseo de Gracia (the city’s equivalent of Fifth Avenue) are bustling.

From the rooftop terrace at the Hotel Condes de Barcelona, you look out over a cityscape where construction cranes outnumber church spires. Over at Sagrada Familia, millions of euros are being spent to stabilize the ground beneath Gaudi’s iconic towers in preparation for the construction of a high-speed rail link with France. Meantime, work on the church itself is pushing ahead with a goal to finally completing it by 2026, the 100th anniversary of the death of the controversial architect whose distinctive buildings can be found in all parts of the city.

But underlying all this bustle and activity is a national unemployment rate of 20 per cent and a banking system that is teetering on the brink of meltdown. The government of Prime Minister José Luis Rodriguez Zapatero is hanging on to power by a thread after the passage of a tough austerity program by just one vote.

The latest plan, which comes on top of a €50 billion package announced in January, will cut public spending by another €15 billion, mainly through a 5 per cent across-the-board wage cut for civil servants and a 15 per cent cut for government ministers. (In Spain , government employees can’t be fired so wage cuts are the only alternative to dealing with a bloated public sector.) Planned pension increases were also scrapped along with a €2,500 payment to new parents. The ultimate goal is to reduce the country’s deficit as a percentage of GDP from 11.2 per cent in 2009 to 6 per cent in 2011. However, that would still be double the 3 per cent limit set for eurozone members. The country’s Economy Minister said Spain will aim to reach that target by 2013 but it will likely require more cuts and/or tax increases to achieve that.

Of course, private companies can lay off staff and many are doing so but some, such as the huge Torres winery, are trying to avoid that. Owner Miguel Torres has introduced a program that will eliminate overtime for summer/fall work, when the winery is busiest, in exchange for reduced hours in the winter and the staff has agreed to it. But many other workers are not as fortunate and the Spanish press routinely runs stories of destitute families that have lost their livelihood.

Adding to the country’s woes, rating agencies Fitch and Standard & Poor’s have downgraded Spain’s credit status, the real estate market has collapsed, and the lucrative tourism industry is in trouble, in part due to cancellations relating to air travel uncertainty because of ash clouds from the Icelandic volcano. To top it off, the major trade unions are threatening a general strike, a knee-jerk reaction in tough times. In short, the country is in a mess.

Perhaps the biggest concern is the plight of Spain’s cajas — the equivalent to our credit unions. The cajas hold a large percentage of the country’s residential mortgages and as a result are deeply exposed to the plunge in property values. Last month, the Bank of Spain moved quickly to take over CajaSur, a Cordoba-based bank controlled by the Roman Catholic Church and this may be only the first of several such moves. Overall, the Bank of Spain estimates that impaired loans in the system total almost €100 billion (about C$130 billion).

Why does any of this matter to us? Because, as the market meltdown of 2008-2009 proved, we are truly a global village when it comes to investing. Spain is the fourth-largest economy in the eurozone and is much more important than Greece in the overall scheme of things. If Spain looks like it might have to reschedule its debt repayments, it would set off a chain reaction in world bond and stock markets that could rival the collapse of Lehman Brothers in its impact.

The Spanish stock market is already reflecting these fears. As of the close of trading on June 4, the IBEX 35 Index was down 25.3 per cent year-to-date with much of that drop coming in the past 30 days. That is the worst performance, by far, of any European market this year (by comparison, the German Dow was off just 2.9 per cent).

Spain is certainly well down on the radar screen of most Canadian investors but it is worth keeping an eye on. If the government and the central bank can’t pull the country out of its downward spiral, we could be witnessing the first stage of the break-up of the eurozone.

Photo © FotografiaBasica