Could this Ever Happen Here?

The economic failures of Greece have drawn the big headlines in Europe of late, a country mired in debt whose government bonds are basically accorded “junk” status by the big rating agencies, resulting in borrowing rates north of 15%. The stench of default is in the air, and massive austerity amidst unprecedented levels of unemployment set the stage for a series of continuous showdowns between the European Union’s many governing bodies and the Greek leadership. A slight shot of measurable growth in the Greek economic, however, came as a pleasant surprise, injecting a ray of hope in an otherwise abysmal situation.

It seems, however, that the European Union’s earlier loan package and enforced austerity (a condition to earlier bailout efforts) have only made things worse: “It is clear that the bailout package and the austerity terms imposed on Greece have deepened its recession and added to its already substantial debt burden. The debate now is whether making more cuts and recharging a program to privatize many formerly government-run agencies and social services in Greece will be enough to persuade a reluctant Europe to lend the country another 60 billion euros… ‘It looks like a real unraveling — everyone is taking their own position and as a result cooperation has become an impossibility,’ said Paul De Grauwe, an economist in Brussels who advises the president of the European Commission, José Manuel Barroso.” New York Times, May 24^th. Hmmm… aren’t major budget deficit reduction plans in the U.S. the equivalent of those austerity measures? And Greece has a population of a little over 11 million; the bigger problem may on the western side of Europe in Spain, with a vastly great population of over 46 million.

Ah but Spain, almost forgotten in the recent focus on Greece, may be a vastly more challenging problem than anyone has anticipated. Let’s start with hard unemployment, a factor that has led to more than a week of protests all over the country as local elections took place on the 22^nd. With an official unemployment rate of 21.3%, Spain’s younger demographics appear to be bearing a disproportionate share of that pain. Approximately 45% of the 18-25 workforce is jobless. “Tens of thousands of Spaniards angry over joblessness protested for a sixth day on Friday in cities all over the country, and the government looked unlikely to enforce a ban on the demonstrations, fearing clashes…. Dubbed ‘los indignados’ (the indignant), tens of thousands of protesters have filled the main squares of Spain's cities for six days in a wave of outrage over economic stagnation and government austerity marking a shift after years of patience.” HuffingtonPost.com, May 21^st. The protests (pictured above) continued.

But what may be substantially more dangerous may well be the budget deficits and hidden liabilities of its state and local governments (Spain is actually divided up in to 17 autonomous communities and two autonomous cities). It seems that the level of these financial impairments may have been profoundly underreported. “The story is that regional elections in Spain on [May 22^nd] could bring new parties to power, which as … rememberers of the Greek-debt nightmare know will likely result in the shocking uncovering of a ton of hidden debt… Financial markets have for months been convinced that Spain is ring-fenced from the debt problems of the other European peripherals [The other PIIGS nations]. It had sure better be, because a bailout of Spain would be quite a bit bigger deal than a bailout of Greece or Portugal. If cracks start to form in that conviction, things could get very interesting in a hurry.” WSJ.com, May 20^th.

There is a growing feeling in the European banking community that the incumbents in Spain, from the national to the local levels, have tried to contain the economic devastation by simply lying about the extent of the governmental debts and undisclosed economic ailments. There is nervous twittering within the major debt rating agencies, and if there are any disclosures that come from the newly elected officials looking to lambaste the incumbents they replace, expect another the ratings to fall, the deficit to explode and the true economic to send shudders through global markets, which have already reacted in nervous anticipation of bad news. Even our own markets reflected this nervousness over at least two trading days recently.

A further impaired Europe, with more economic crises to deal with, becomes an even less likely buyer of American goods and the impact on the global debt markets will put that much more pressure on an already decimated American credit market (as Spain sucks up more capacity), making it even more difficult for consumers and small businesses to access debt. Greece, because of its relatively smaller population, is an equally smaller issue when compared to the possibilities in Spain.

The thought that distant lands and distant economies have marginal impacts on American values is a myth that seems to die hard. The rain in Spain is a big drain on the U.S. as well. Don’t believe that there is a link? Look at the reaction of the U.S. stock market when there is a negative announcement in Europe.

I’m Peter Dekom, and we are all so overwhelmingly connected.