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Monday, 21 November 2011

Spain: ¡Nuevo gobierno, viejos problemas! New government, old problems!

Sunday, November 20, was the day of the elections for a new government in Spain. It was widely expected that the PSOE (Socialist Labor Party of Spain) of Prime Minister José Luis Zapatero would be punished for the economic misery that the country is in right now.

Today, the results of the Spanish elections were published: with 99% of the votes counted, it was clear that there indeed had been a great victory for the rightwing Partido Popular of Mariano Rajoy. With 186 seats (was 154 seats during the last election), the PP gained 32 extra seats and reached the absolute majority, enabling it to form a government without a coalition partner.

Prime Minister Zapatero’s PSOE dropped to 110 seats from 169. It was said to be the worst result ever for the PSOE, according to the English newspaper Morning Star ( With only 57% (3.5% less than in 2008) the turnout was disappointing, showing that there is little confidence of the Spanish people in the government these days.

Investors that had their hopes on a rally in Spanish sovereign bonds after the PP victory, will have been disappointed by the indifferent reaction of the financial markets today. The FT writes on the today’s bond market:

Sovereign bond investors were unimpressed by an overwhelming win for Spain’s centre-right Popular party (PP) in Sunday’s general election, with the yield on the country’s 10-year bond rising by 12 basis points to 6.56 per cent on Monday.

Italian yields, which dipped briefly below Spain’s late last week, also continued to be in the danger zone, with Italian benchmark 10-year bonds flat at 6.70 per cent.

There had been hopes in Spain and Italy that the prospect of new governments would lead to a fall in the perceived riskiness of the two countries’ sovereign bonds.

But neither the appointment of Mario Monti, former European commissioner, as Italian prime minister, nor the Spanish election win by Mariano Rajoy, PP leader, has had much of an impact in the secondary markets, suggesting that Rome and Madrid will struggle to finance their public spending at reasonable rates in the weeks ahead.

And why would the bond markets have strongly reacted to the elections?! To be frank: I expect that the interest on the Spanish 10-year bond will drop slightly (10-15 basis points) in the coming days, out of a delayed positive sentiment. But that will be it. 

The new government has neither solved anything yet, nor has the blueprints ready for doing so . The only thing it tries to buy now, is time. But the financial markets want to see action and they want to see it quickly.

The main problems of Spain are: 
  • Extremely high unemployment (21.5%); 
  • A truly massive youth unemployment (45+%), turning the current youth almost in a generation ´Nought´; 
  • An economy with virtually no growth, that is still largely based on tourism and that has fierce competition from Greece, Turkey and France in the struggle for the sun-lover’s euro 
  • A manufacturing industry that is already ailing for years and that yet misses the drive to reinvent itself. 
  • An imploded bubble on the commercial and residential real estate market that keeps billions of euro´s locked in useless houses and office buildings that can't be sold. 
  • A country that  slowly, but surely is turning into a desert in the southern territory (Andalucia), diminishing the possibilities for agriculture and cattle-breeding.
But there is more. Today on Dutch radio station BNR (Business News Radio), Dirk Kremer, chairman of the ´Circle of Dutch Entrepreneurs Barcelona´ gave his opinion on the new Spanish government:

´I hope that the new Spanish government has something in store for entrepreneurs, to help the 5 million Spanish unemployed people finding work. A Spanish company has in average between 5 and 10 workers. This means that to get rid of most of the 5 mln unemployment rate, you need at least 400,000-500,000 new companies.

Private initiative is necessary here, as the government can´t do this on their own. The state debt has soared to €353 bln, a rise to 67% of GDP from 36% in 2008. One thing the Rajoy government can do, however, is making it easier for people to start a new company. Currently it is very hard to start a company in Spain, due to lots of red tape. In a recent investigation in 180 countries, measuring the ease at which small companies can be started, Spain ended with position 150 at the bottom.

Also the labor market should become more flexible with more flexible and centralized collective labor contracts (CLC). Now every province has its own collective labor contracts. In practice, this means that some companies have hundreds of different CLC´s, due to having production facilities all over the country; a bureaucratic disaster.

The costs for lay-offs should also be lowered and the labor law, still coming from the Franco age, should be modernized. The banks should be reorganized and the Spanish budget deficit should be diminished. The latter demands for at least €30 bln of austerity measures in 2012 and another €15 bln in 2013. On top of that, there should be extra credit facilities for companies to start up and grow bigger.

And at last there is still €176 bln in problematic debt in the Spanish banking industry. Spanish banks suffer from large numbers of seizures, making their daily operations almost impossible.

If you listen to this list of problem zones in Spain, the problems almost seem unsolvable, especially for a cash-strapped government that has no money printing facilities left. There is no way that ´out of the blue´ 400,000 new companies will be started in Spain. So unless there is an inflow of large, foreign companies and production facilities that will create thousands of new jobs, the unemployment will remain extreme in many years to come.

And with the €45 bln in austerity measures for the next two years, the Spanish economy will almost be choked to death.

However, Dirk Kremer is right with one thing: if the new Spanish government would get rid of all the red tape, this would help enormously to lure foreign companies to Spain. Now the opposite happens: Spanish workers going to other countries, like France, Germany and The Netherlands to earn there the money for their families at home. Just like in the 60’s of the last century, when the Dutch steel mills were operated by Spanish immigrants of whom still many live in The Netherlands and never returned.

Summarized, the situation in Spain is close to hopeless and the new Spanish government stands for an almost impossible task. The money markets know this and they acted accordingly today: by letting the interest a little south of 7%.

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