Rajoy again failed at securing another term as prime minister of Spain – the third general elections within one year loom on the horizon. Political commentators, in Spain and elsewhere, are at a loss. What to do with Spain?

I found this comment by a Financial-Times reader (Michael Pettis) interesting

Last year was as good as it gets for Spain in terms of tailwinds. Prices of industrial metals, commodities, and energy, all of which Spain has to import, were sharply down. Money was loose, helping to drive foreign purchases of real estate. Terrorism in France and the eastern Mediterranean was hugely positive for Spanish tourism. But with all that, Spain grew by I think 3.2% while its deficit came in at 5.2%. In other words Spain still cannot grow its way out of its debt burden with even these massive tailwinds, which of course cannot be repeated forever (and God forbid there is a terrorist attack in Spain). And of course as the debt burden rises, it acts as a headwind against growth and so makes the gap between GDP growth and the deficit widen further.

That is why I still see no reason to believe that there will be a resolution of the country’s economic problems until the debt is written down. But against whom is it to be written down? The rich? They’ll easily flee. Middle class households? Consumption will drop further and tank the economy. Workers? Yeah, right, as if they have any room for more pain. The government? It doesn’t have enough assets.

I can only do my arithmetic and conclude that Europe, i.e. Germany, must bear the brunt of the adjustment costs. I don’t see how else to get the numbers to work.

Germany won’t be doing any such thing. Debt is the real-time bomb for Spain and other deficit countries.


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