Despite Spiraling Contagion Fears, Spain Debt Worries Are Overblown
The Spain debt outlook is nothing like that of its Greek counterpart. When you get right down to it, Spain looks more like the United States than it does the other European "PIGS" (Portugal, Ireland, Greece and Spain, or "PIIGS," if you wish to include Italy). It's because of those U.S. similarities that Spain is fairly unlikely to share the fate of its Mediterranean neighbor, Greece, which is essentially insolvent.
Indeed, in one respect, Spain's position is actually much better than its U.S. counterpart. We'll see why shortly.
A Tale of Two Monocracies
Like Greece, Spain suffered from a reviled dictatorship that exited the scene in the 1974-1975 time frame. The dictatorship in Greece ended in 1974 with the collapse of the "Regime of the Colonels," while the curtain came down on Spain's autocracy in December 1975 with the death of General Francisco Franco.
However, both the tenure of the dictatorships and the two countries' reactions to the collapse of their respective regimes were quite different.
Greece's dictatorship lasted only seven years, was never stable, and occupied itself mostly with corruption, military expenditure and saber rattling in Cyprus. Franco, on the other hand, after winning a truly devastating civil war in 1939, devoted himself over his remaining 36 years to developing his country's economy on a more or less free-market basis, with low public spending, while maintaining an international posture of caution and neutrality.
With the two countries traveling down such divergent paths, it's no surprise that they experienced very different outcomes. By 1975, Greece was a total basket case, with only its offshore (and non-taxpaying) shipping sector flourishing, whereas Spain was a rapidly developing tourist magnet, with a substantial industrial economy behind it.
The Next Phase
After 1975, the two countries continued to develop very differently. Greece – which had exiled its king, Constantine II – elected the leftist socialist Andreas Papandreou and in 1981 joined the European Union (EU), where it became a master in the art of subsidy corruption: After all, Greece was the union's poorest country at that time.
Spain, on the other hand, kept King Juan Carlos, who thwarted a coup in 1981, elected a moderate social democrat government under Felipe Gonzalez followed by a very good center-right one under Jose Maria Aznar. The nation also developed the best luxury tourism sector in Europe, together with one of its best business schools in the University of Navarra's IESE.
Today, while both countries have similar per-capita GDPs – $33,700 for Spain and $32,100 for Greece – Spain is ranked 32nd on Transparency International's Corruption Perceptions Index, while Greece is ranked 71st – below much poorer countries like Bulgaria and Ghana.
Spain's debt load – at about 55% of GDP – is less than half of its Greek counterpart. Clearly, Greece's GDP per capita needs to be sharply deflated for the country to regain competitiveness; it's much less clear that Spain needs to do the same.
Why Spain Won't Flinch
In addition to a budget deficit of 11.5% of GDP in 2010 – very similar to that of the United States – its banking and real estate mess (though the largest bank, Banco Santander SA (NYSE ADR: STD) is pretty solid), and its relatively low debt, Spain (also like its U.S. counterpart) also has itself a left-leaning government with a proclivity for overspending.
Prime Minister Jose Luis Rodriguez Zapatero was unexpectedly elected on an anti-U.S. platform after a terrorist attack in 2004, and was re-elected in 2008 – both times by small majorities. Zapatero is undoubtedly responsible for much, though not all, of Spain's budget problems; he undertook two economically damaging "stimulus" packages in 2008 and 2009 and has raised public spending from about 38% of GDP when he took office to 46% of GDP today.
In fairness to Spain, the big run-up in spending wasn't due to a big run-up in poorly thought out handouts: The country moved enthusiastically – perhaps too much so – into the green-technology sector, to the point where an all-too-familiar boom-and-bust scenario played out.
Like the United States, Spain is stuck with its left-leaning administration until 2012 (both have four-year electoral cycles; Spain's is seven months earlier). However, it has one enormous advantage over the United States – a savings ratio (personal savings as a percentage of disposable income) that stood at an extraordinary 24.7% in the 2009 fourth quarter, compared with a mere 2.7% in the latest month here in the United States.
Admittedly, Spain's saving is highly cyclical, so the annual average is only about 20%. Nevertheless, the much-higher level of domestic saving suggests Spain should be able to finance its budget deficit domestically much more easily than will the United States.
With public debt also lower than in the United States – let alone in Greece – Spain's position is thus fundamentally sounder. It should be relatively easily able to navigate the current storm and ride out the current government's spendthrift tendencies – giving the voters the chance to put a more-fiscally-appropriate government in place in the next election.
That being said, investors have to acknowledge that panic can trample logic. Indeed, as U.S. investors learned all too well back in 2008, in a market panic even well-run institutions can get into trouble (not that many of the Wall Street houses of that year were well-run, but a few were).
The same is true of countries, and Spain under Prime Minister Zapatero has weak-and-economically damaging leadership, which the voters are stuck with for another two years. Nevertheless, with its debt rating still a very respectable "AA," only the worst storm should cause Spain to take the same kind of crisis-spawned battering that Greece continues to face.
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