The Spanish government under Prime Minister Mariano Rajoy is only six months young and has had more problems to deal with than probably most his predecessors in modern history. Spain, among the hardest hit countries of the Eurozone debt contagion, saw unemployment surge from already record levels, local real estate markets plunge, tax receipts erode and borrowing cots sky-rocket.
Today, bond yields rose back above7% which may jeopardize a €100 billion bailout from the European Financial Stability Facility. Terms were reached and Spain became the fourth Eurozone member to ask for a bailout after Ireland, Greece and Portugal. German lenders cheered as they came out on top and are the biggest beneficiary of the Spanish bailouts due to their heavy €113 billion exposure to the Spanish economy.
The Eurogroup are meeting in Brussels today, again, and will discuss the 30 month old contagion that has dragged many members into a recession. There is no easy solution to this problem and a lot more blood will line the streets from London to Brussels, from Paris to Berlin, from Madrid to Athens and from Dublin to Rome through Lisbon and Vienna. You get the picture.
Can Spain avoid begging for money a second time?
This is highly unlikely. The terms of the first bailout are in jeopardy and just like the Greeks, Spain will ask for money again possibly before the end of 2012. The young government of Rajoy, which is center-right, delivered a rather big disappointment with the most recent proposal about heavy tax increases which will include necessities such as food and therefore will send the Spanish into a Depression.
Unless Rajoy will slash taxes and cut socialistically inspired spending, Spain will be begging for a second and third time. Spain want to increase tax revenues by 4.3% in 2012 as compared to 2011 and the only way tax revenues will increase will be through tax cuts. Even extensive tax cuts will not yield immediate results, but at least they will allow Spain to ask for a third bailout and avoid a depression.
What would be the best way out for Spain?
Since there is no easy solution to a decade-long self-destructive policy, a la United States, there is one step which will not happen. I have one name for you: King Juan Carlos I of Spain.
Spain is a parliamentary monarchy, but for the sake of Spain given its current situation a full monarchy would allow Spain to shift into the fast-track to recovery. The current government thinks about tax hikes rather than tax cuts and unless the monarch supports this ideology he should step in and cut taxes to safe his nation.
Since neither tax cuts nor a full monarchy will materialize, Spain will follow Greece and beg for more bailouts, higher bailouts. Expect the next round of Spanish bailouts either in the fourth-quarter of 2012 or the first-quarter of 2013. I would not rule out stark revolts followed by riots on the streets of Spain starting in the third-quarter.
