Now that Greece is behind us, What about Spain?
Europe seems to be trying to ignore any other problems hoping that they will just go away.
In Spain, almost all of the toxic debt is held in the private creditors and lenders. The debt level of the non-public sector, specifically homes and non-financial companies, was 227.3% of GDP at the end of 2010, according to Eurostat.
One of the areas where change is occurring is in the home market. The best index for Spain is the new data by the Nation's Institute of Statistics, which shows the final index for home prices slid by 11.2% in 2011, but was only down 21.7 % from the top in the 3rd quarter of 2007.
You need to remember the Spanish housing bubble was way more acute than others, but costs have only come down by around a 5th. In the Madrid area the movements have been more powerful, with a top to bottom fall of 29.5 %. Spain's home price restructuring is still less than halfway complete.
In real terms, the US housing boom has been just about totally cancelled out. The graphs of consequential bubbles, if viewed in real costs, have nice bell-shaped curves.
This sounds correct, since domestic property is a pointless real asset. In Spain, as everywhere else, it'd be reasonable to think real costs will at last fall to where they were in the middle to late 1990s. The Spanish govt. has forced the savings banks to put 50B euro. in their property portfolios this year.
This may simply be a little part of what will finally be required if the home market falls as I predict it will.
Official data shows that if prices only fall moderately with a fast rebound in the economy the worse might not occur.
Both expectations are delusional.
How can the Spanish economy rebound if the non-public and the general public sectors are deleveraging at the very same time, and are probably going to do so for a number of years?
The deleveraging of the general public sector will be vicious. The deficiency was 8.5 % of GDP last year.
The recently-revised target is 5.3 % for this year and 3 % next year are also ridiculous and impossibilities. So that the total public sector restructuring required under the European bailout rules is 5.5 % over 2 years this, in the middle of a recession.
If you glance at the extent of total deleveraging that lies ahead, in both non-public and public sectors, the issue is not whether the Spanish economy rebounds in 2012 or 2013, but whether it can rebound at all before the end of this decade.
The typical European reaction to the last statement is to say that business reforms will increase confidence and produce expansion. The optimists point to Italy, where the appointing of Mario Monti as P. M. has led on to an allegedly just cycle of reforms and lower market rates. Even the lift of his appointment is only temporary; sooner or later they have to deal with the numbers and not the man.
For Spain, the right alteration policy would be a program to push the private area to deleverage, over 3 to 5 years, supported by regularly strong public sector deficiencies, and, accompanied by economic and financial reforms also.
Spain remains stuck in a worsening debt trap, out of which default will be the sole escape.
If it continues the austerity policies, it might finish up where Greece, Portugal and Ireland are under a rescue umbrella. This is the most probable eventuality for Spain.
The worst, I fear, still lies ahead.