Monday, February 15, 2010

Spain's welfare mentality limits debt reduction plans.

This is what happens when a socialist government with a sizable amount of its population being entitlement welfare receivers meets financial reality. It does not have the political will to actually cut costs.

The collapse of a real estate- and consumer-fueled boom has left Spain with a eurozone high jobless rate of nearly 20 percent, and the government ran up a deficit that in 2009 equaled 11.4 percent of GDP. That is way over the eurozone limit of 3 percent and earned Spain a place as the letter "S" in the inelegant PIGS acronym coined by analysts (the others are Portugal, Ireland, and Greece).

Spanish officials argue they are better off in several respects. National debt as a proportion of GDP -- 66 percent this year and peaking at 74 percent in 2012 -- is well below the EU average and far under Greece's 113.4 percent for 2009.

It does not have credibility problems like Greece, which is accused of fudging its debt numbers, and its banking system is relatively sound compared with other countries that had to bail their banking systems out.

Still, Spain has tried to spend its way out of recession with costly job-creation and stimulus measures, running up a budget shortfall that has spooked markets and lenders. Spanish sovereign debt has come under pressure, with creditors demanding a steeper interest rate to buy it and rates also rising for insurance against default


All that spending will hurt but they have no other choice because their population are nothing more than welfare pigs.

....Ireland, by comparison, has slashed pay for state workers, cut welfare benefits and imposed new environmental taxes on fuel to try to contain its runway deficit.

But Spain is not touching public-sector wages, most of the spending cuts have been assigned to regional governments that Madrid cannot control, and the only taxes due to rise are VAT and levies on capital income like stock dividends. This is not expected to make a big dent, and even then the rises do not kick in until July.

..."I think it would be very unlikely that the deficit gets anywhere near 3 percent unless they implement further, significant fiscal measures," May said.

Nuno Serafim of IG Markets said Spain and also Portugal need to serve up a bitter cocktail of higher taxes and deep spending cuts, but this is a hard sell because of the entitlement-heavy mentality of people in southern Europe.

"Governments in southern Europe are less pragmatic than in northern Europe," he said. "Normally, they try to avoid unpopular policies because they are more prisoners of the political agenda and the electoral agenda."

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