Is Spain On The Edge of Bankruptcy?
Greece has gone down the tubes and other countries in the EU are rumored to be in trouble. So, is Spain on the edge of bankruptcy or is the threat overstated?
The good times never last, but countries never seem to understand as much. Throughout much of the first world, governments have promised huge benefits to their population that can’t possibly be met. Greece is a perfect example of this, but it is hardly the only country with this problem. Much of the EU has similar problems and so does the United States with Medicare and Social Security liabilities coming due in a big way in the next ten years.
So, what about Spain? Along with Portugal and Italy, it is considered the next country at risk when discussing the western countries in the European Union. The truth of the matter is its finances aren’t as bad as Greece. Spain’s debt is about 90 percent of its gross domestic product while Greece is at 140 plus percent. Spain is also running a seven percent annual budget deficit compared to Greece’s 14 percent. While the numbers are not positive for Spain, they don’t appear to be at crisis levels.
Okay, so why the panic? There are two primary reasons. The first is stress on the economy. The unemployment rate in the United States is currently just below 10 percent. The figure for Spain is 20 percent. That means one out of every five employable individuals is out of work. This puts strain on the government finances in two ways. First, it cuts down the tax revenue coming in. Second, it increases the amount the government is paying out in revenues. That’s a double whammy on the bottom line and makes turning around the economy difficult at best.
The second issue is the banking situation in Spain. As surprising as this may be, the industry has not gone through its weeding out period. There are a ton of banks that have massive amounts of bad loans on their books. It’s like being in the US in 2007. The failure of a massive number of banks in Spain is inevitable. It will be a painful process and one that could tip the economy into the tank, which could lead to bailout issues.
Is Spain on the edge of bankruptcy? No, but it can see the edge from where it is standing. If it fails, it is hard to see how Portugal and Italy will not follow it. The very viability of the European Union will then be in doubt.