Today the news is eerily reporting that the costs of financing Spanish debt and deficits are rising. It’s early yet to be sure but it seems that the Faustian bargain of debt and spending that ensnared Greece has a strong chance of roping Spain in too. The reason why Spain is in danger, like Greece before, is that even though they are implementing strict austerity measures their debt load continues to pile up as deficits are shrunk but not eliminated. Then you add a in a steep recession. The toll that recessions take on economic activity ensures that the decline in Gross Domestic Product (GDP) far outpaces any decline in public debt. So even though Spain has been implementing austerity measures their debt-to-GDP ratio is anticipated to climb from 68.5% in 2011 to 79.8% in 2012. After all the tough decisions and budget cuts they will still end up in a worse position. Once this downward spiral begins, when does it end? Nobody knows the answer to that but it must surely end. We have yet to see the end for Greece as they are still locked out of the bond market. And Spain is just beginning.
Brennan R. Redmond, CFA
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities)