If you thought Greece was in trouble (and it is), the alarm bells ringing in Spain are cause for greater concern. The 8th largest economy in the world by GDP (nominal) has gone from one of Europe’s fastest growing economies to one of the most troubled in the European Union.
Fitch, the credit rating agency downgraded Spanish sovereign debt last Friday due to the countries sluggish economic outlook.
The Financial Times reports that Fitch said it had downgraded Spain’s long-term foreign and local currency ratings by one notch to AA+ from triple A, a step that is likely to increase the cost to Spain of raising new debt and rolling over previous loans on the bond markets.
“The downgrade reflects Fitch’s assessment that the process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium term,” the agency’s Brian Coulton was quoted as saying.
Spain and other Euro zone economies are struggling to reconcile the need to cut budget deficits to reassure investors they are bringing their public finances under control, with the equally important aim of restoring economic growth after a long recession.
On Thursday, Spain’s Socialist government narrowly won a parliamentary vote to enact its latest austerity plan, involving €15bn of budget cuts through a 5 per cent cut in public sector pay, a freeze on pensions and reduced government investment.
The target is to cut the budget deficit from 11.2 per cent of gross domestic product in 2009 to 6 per cent in 2011 and 3 per cent in 2013.
It couldn’t morph into a Greek bailout scenario? Could it?
By any measure the Greek situation is worse.
|
Indicator |
Greece |
Spain |
| Debt to GDP |
125% |
53% |
| Deficit to GDP |
14% |
11.2% |
| Unemployment rate |
10% |
20% |
Whilst sovereign debt appears to be very modest, it’s significant unemployment rate which has now stabilised at 20% is a great concern. During the boom years, employment was driven by a construction sector which accounted for more than 15% of GDP at its peak. The GFC dismantled the labour market very quickly. More bailouts, money printing…..you have heard it all before.
Hungary
News over the weekend that the new Hungarian government has advised of a potential Greek Style meltdown sent equity, bond and currency markets into a tailspin.
Whilst this latest development is not surprising, having already been bailed out during the height of the GFC by the International Monetary Fund, this has disappointed investors and authorities who had hoped that austerity measures undertaken as a result of the last crisis were now starting to work.
Compounding this news was US unemployment numbers that fell short of expectations and saw the Dow lose 323.31 points (3.26%) to close at 9931.97. So where are we now?
Central Banks continue to print money in order to kick start economies around the world creating credit bubbles everywhere. Paper currencies are in a race to the bottom and in our view inflation in massive doses may be around the corner. We do not see a way of solving the problem short term and are uncertain that the Keynesian deficit spending model will work given our experience so far.
What to do
Many of our clients in retirement mode are concerned by the current state of play and justifiably so. We continue to advocate holding a healthy reserve of cash in the defensive part of the portfolio and at minimum suggest 2 – 3 years worth of pension payments. Further, precious metals in particular GOLD will benefit from any further fiscal and monetary deterioration from here, and lastly we encourage you to speak to your adviser as often as required during times of significant market volatility.
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