Spain’s two trillion euro public debt is a ticking time bomb…

21^st February 2023

I sincerely apologize in advance to our gentle readers for banging on this topic again, but I find it most necessary to be addressed.

Last November I published a scathing article on Spain’s second wealth tax. In this article I digressed to cover the matter of Spain’s ballooning public debt. At the time, I quoted the official figure of 1.5 trillion euros, which we now know to be incorrect. In January 2023 it was made public that there was an additional (hidden) 500 billion euro debt held between Spain’s 17 regions. For technical reasons, that I will not go into, this debt is not tallied in the overall public debt. But to all intents and purposes, it is obviously a part of it. So the real public debt of Spain now stands at 2 trillion euros. Let that sink in.

'Officially' our debt to GDP ratio stands at 113%, which doesn't look all that bad. However, when we tally the 'hidden' debt from Spain's 17 regions (the 500 billion euros), the truth is closer to 170% of GDP which starts to mark a point of no return. Every day over 300 million euros are piled onto this debt as rolled over interests. One third of Spain's national debt is held by the European Central Bank, Spanish banks hold a large percentage as well 'encouraged' by the government.

You can chek out Spain's public debt in real time here: Spain's debt clock

I stress again that inflation levels are here to stay for the long run, no matter what monetary authorities the world over claim (US Fed: “transitory inflation” yada yada). Fact is we are going to live through a decade of high inflation. Historically, the only way to combat a high inflation is by way of cooling the economy by raising the price of money (interest rates). You can go blue in the face arguing the contrary, but central banks will be raising interest rates over the next years no matter what.

Ok, now we have put that out of the way, let’s focus on Spain. As I’ve highlighted in multiple articles and blog posts over the years, Spain has a severe overreliance (read addiction) to public debt. Now while it's true that most western countries are heavily indebted, the prime example would be the US with a 33 trillion debt (bonkers), Spain has serious structural issues it needs to address.

In a context of soaring inflation (in Spain officially standing at 6% YOY as of January 2023, unofficially its well over 20%), holding a huge public debt is in effect a time bomb. If interest rates continue to rise sharply, in a trend that shows no signs of abating, Spain will have serious issues to face its interest repayment commitments, let alone the principal. Each 100 basic points in rise translates to approximately 14 additional billion euros in interest repayments alone (source). As a result, the overall debt increases with each new rise of interests, which in turn commands a higher interest rate going forward.

This is not science fiction.

Back in 2011 – 2013, Spain almost defaulted when credit rating agencies lambasted Spain’s borrowing ability. It’s ability to repay the loan interests on its multiple financial commitments almost failed and was on the verge of being bailed out by the IMF/EU. Had it not been for the decisive and resolute intervention of the ECB, Spain would have defaulted. Just for reference, our debt to GDP ratio was at the time sitting at 35% (2007). Now its at 170% GDP and mounting...

You’d think that after such a close call, our politicians would have learnt the lesson and would be weary of over indebting the country again – well, think again. The incumbent Spanish President has ballooned our public debt by well over 30% in the space of only a couple of years seeking short-term political gains. I just cannot begin to word how very irresponsible this is.

If the trend in rising interest rates continues unabated (fostered by soaring inflation, wars, and new Covid strains which disrupt the worldwide supply chain), as it is highly foreseeable, Spain will face severe challenges to honour its repayment commitments which may even lead to a default over the next years.

The fact is that the European Union has, for far too long, indulged in Spain’s reckless public credit addiction embodied by Mr Sanchez. This needs to be put to a stop, not only to save Spain, but the Union as a whole.

If Spain (and Italy, which doesn't fair much better) defaults, will Germany, the Netherlands and others rally to pay Spain's public debt? Really? This could seriously jeopardize and compromise the Union itself, as some countries would opt out (as they have no independent monetary policy to devalue their own currency).

Spain has the highest unemployment levels of any country in the OECD (38 countries). Officially its 13%, the truth being far more. Youth unemployment is well over 50%.

Spain also happens to have the highest fiscal pressure in all of Europe (highest taxes), on average 27% higher than its European peers.

I don’t know, I’m no economist, but you’d think someone would look into a correlation between high taxation and high levels of unemployment and draw meaningful conclusions, hmm? It doesn't take a nobel prize in Economy to realize that high taxation does not attract foreign investments, quite the opposite. It also does not create incentives fort businesspeople to start their own companies. High taxation kills the economy, and most fundamentally impoverishes the middle class which is the backbone of a healthy democracy.

In my humble view, Spain needs to urgently:

1. Lower taxes across the board (as is being done in Andalusia, Galicia, and Madrid to much success, creating thousands of new jobs on its wake). The misguided economic policies pursued by our social-communist government, driven by ideological reasons, only weakens the economy and creates unemployment. It’s the economy stupid!
2. Deregulation. Streamline and simplify admin procedures, reducing red tape. These changes would carry over to multiple aspects, getting rid of the deadwood in an oversized public sector, and making it leaner and more efficient.
3. Address once and for all high civil servants’ wages. Nobody wants to open this can of worms, albeit the country cannot afford to pay 14% of its GDP in public civil servants wages, its ridiculous. Civil servants, that have attained their station through hard exams, deserve every cent they earn, granted. However, the problem lies with the vast majority of civil servants who have taken no exam, are grossly overpaid (i.e. town halls), and in most cases have been assigned for their political affinity in lieu of their competency. In fact, public sector wages are on average 70% higher than their private sector counterparts. Spain can simply not afford it.
4. Reduce public expenditure. As an example, Spain has 22 ministries (again, crazy). Spain must drastically cut back on its wild public expenditure to create a lean, small, and agile public sector. As is stands now, we have a bloated public sector with over 5 million civil servants that don't even answer the phone (or email back) to take appointments. The system has collapsed.
5. Cut back on NGOs (chiringitos, in Spanish) which soak up billions of euros in grants, aids, subsidies and whatnot every year. It’s just paying back for political favours and serve no real purpose.
6. Centralize and restructure its regional bodies, cutting back on redundant political and outdated administrative structures that serve no practical purpose (other than to provide a golden highly-paid retirement nest to glorified ex-politicians).
7. Liberalize land. A huge culprit in the high prices of land are town halls themselves through their taxation which they use mostly to fund the super high wages of civil servants (which, in most cases, have passed no entry exams and are appointed for 'political affinity' btw). This would immediately impact on housing, by way of greatly reducing the raw material of development: the land. This would make housing more affordable across the board.
8. Pensions. It’s a volatile topic, granted, but Spain cannot realistically afford to pay the new over-the-top pensions. Spain’s Social Security is bankrupt, it keeps getting bailed out by our central government again and again, which in turn is bailed out by our (overgenerous) EU Overlords.
9. Spanish banks need to start paying interests on bank deposits to foster saving habits and protect wealth. Spain is the only country in the EU which banks are giving a 0% interest on bank deposits. Guess where all the pensioners and people who have savings are piling their debt into? Yes, that’s right, they are buying like there is no tomorrow Spanish public debt which gives them almost a 3% annual interest. Still well below inflation, but hey always better than nothing. The cynic in me cannot stop thinking this is being done on purpose by our government so our savers pile all their money into Spanish public debt, creating a pernicious debt spiral. God forbid!

Inset photo: Spanish savers frantically queuing up at Spain's Central Bank to buy Spanish public debt (gilts). As reported by Expansion in January 2023.

Spain had a tax surplus of over 130bn euros in the last tax year (because unlike other EU Member states, it did not deflate taxes in line with inflation), it has received over 37bn euros from a NextGen Funds aid packet of 130bn euros. You'd think that after this huge windfall Spain would be swimming in cash, yes? Wrong! After all this, it is still very much strapped for cash! Shouldn’t this unrelenting craving for public debt set alarms off, hello anyone?

I’m really sorry to bang again on this, but the EU must intervene and cut back on Spain’s unbridled craving for public debt. It is leading the country to a financial disaster, over indebting all future generations, and to top it off, it poses an existential threat to the European Union itself.

Spain's huge public debt is a major source of concern for us all, with independence of the reader's political affinity. It doesn't matter one iota what people's ideology is, the only thing that matters is what Spain is going to do to solve this, and more fundamentally, what the Union is going to do about it to avoid the ghost of a new Greek default that would shake the foundations of the Union to its very core. The only difference is that Spain's economy is far larger than that of Greece in 2015.

Ideally, the (huge) structural problems that Spain faces should be addresssed - voluntarily - by Spain itself, before it is too late.

Realistically, knowing all too well our political class, from all the political spectrum, they are simply not fit for the task and it will ultimately hinge on external players (the Union, the FMI, etc, creditors in effect) who will bear the onus to impose on Spain such structural changes.

Meanwhile, back in Spain, Podemos, the pro-Russian, hard-left (read communist) junior partner of the socialist government, relentlessly seeks to purposely overindebt the country further (besides attacking the Constitution of 1978 and the Monarchy), day in and day out, with stupid social and economic measures (e.g. universal rent of 1,400 euros, higher taxation levels, new taxes, higher public expenditure, increase the debt ceiling, etc) that will only lead to an unmitigated economic disaster that will threaten to break up Spain (separatists, nationalists, pro-terrorists, the governments political 'allies' would all jump at this golden opportunity). Hmm, I wonder who would stand to benefit from the ensuing economic chaos, the social upheaval, the political instability, the disunity?

The breaking up of Spain - as a unified political entity since 1492 - would create massive ripples that would lead to the weakening of core European Union pillars and institutions that act as guarantors of peace and stability throughout the continent. Such rash actions would only benefit bears' and dragons’ autocratic and expansive political agendas. European politicians, for the most part, play checkers whilst power-hungry players due east play chess, to win.

People, smell the coffee and get a grip!

“When you owe the bank one million, you have a problem.

  When you owe the bank 100 million, the bank has a problem.” – Anonymous.

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. Ní neart go cur le chéile. Voluntas omnia vincit.

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