Italy is bound to default, but Spain may just get away without having to do so

The Centre for Economics and Business Research ^ | 8-4-11 | The Centre for Economics and Business Research

[joinedafterattack]

Realistically, Italy is bound to default, but Spain may just get away without having to do so

It is important to understand the different dynamics of the Italian and Spanish situations. We have modelled a ‘good’ outcome and a ‘bad outcome’ for both to see if they are likely to be able to stave off default, flexing growth rates and borrowing costs.

For Spain, even the bad outcome has the debt GDP ratio remaining no higher than 75%. This depends, though, on the banks not being forced to take major capital losses on their property portfolios and therefore no additional financing of the banking sector by the government. They have got away with it so far. The key to Spain is that their exports remain fairly successful despite the strength of the euro, and most of those owning empty property are middle class families who have not yet dumped it on the market. Fingers crossed but there is a real chance that Spain may avoid default and debt restructuring unless it gets dragged down by contagion.

For Italy, the calculations are different. The starting debt position is much worse at 128%. Although Mr. Berlusconi has actually managed to run a tight budget, it is still not tight enough. And if the markets continue to force on them borrowing costs at around 6% and growth stays close to zero, our calculations show the debt GDP ratio rising gradually to over 150% by 2017. Even if the cost of borrowing goes back down to 4%, their growth rate is so anaemic that we see the debt GDP ratio remaining at 123% in 2018.

[joinedafterattack]

Realistically, Italy is bound to default, but Spain may just get away without having to do so

The failure of the European leaders to sort out their economic problems before going away for August has left Italy and Spain in the lurch. Prime Minister Zapatero has cancelled his summer holiday; Prime Minister Berlusconi, whose everyday life resembles a Club 18-30 holiday, has not actually given up his own summer plan but is making an unusual address to the Italian Parliament today (Wednesday).

It is important to understand the different dynamics of the Italian and Spanish situations. We have modelled a ‘good’ outcome and a ‘bad outcome’ for both to see if they are likely to be able to stave off default, flexing growth rates and borrowing costs.

For Spain, even the bad outcome has the debt GDP ratio remaining no higher than 75%. This depends, though, on the banks not being forced to take major capital losses on their property portfolios and therefore no additional financing of the banking sector by the government. They have got away with it so far. The key to Spain is that their exports remain fairly successful despite the strength of the euro, and most of those owning empty property are middle class families who have not yet dumped it on the market. Fingers crossed but there is a real chance that Spain may avoid default and debt restructuring unless it gets dragged down by contagion.

For Italy, the calculations are different. The starting debt position is much worse at 128%. Although Mr. Berlusconi has actually managed to run a tight budget, it is still not tight enough. And if the markets continue to force on them borrowing costs at around 6% and growth stays close to zero, our calculations show the debt GDP ratio rising gradually to over 150% by 2017. Even if the cost of borrowing goes back down to 4%, their growth rate is so anaemic that we see the debt GDP ratio remaining at 123% in 2018.

[50gunsalute]

this story may be true,
but is misleading.

there is an ongoing run on the banks
in Italy and Spain

[JerseyHighlander]

For Spain, even the bad outcome has the debt GDP ratio remaining no higher than 75%. This depends, though, on the banks not being forced to take major capital losses on their property portfolios and therefore no additional financing of the banking sector by the government. They have got away with it so far. The key to Spain is that their exports remain fairly successful despite the strength of the euro, and most of those owning empty property are middle class families who have not yet dumped it on the market. Fingers crossed but there is a real chance that Spain may avoid default and debt restructuring unless it gets dragged down by contagion.

This is, as the Brits would say, utter poppycock. The underlying hypothetical would require that the Spanish middle class isn't strained over a long number of years as the Spanish economy waxes and wanes, that the middle classes and developers and the banks that foreclosed on developers and defaulted mortgages can maintain the costs of upkeep, and most importantly, that there are enough people in Spain to actually buy all these properties if Spain stays in the Eurozone.

Spain has more houses than people, over a 20 year over supply, and the lowest birth rate in Europe, darn near lowest in the world. So outside of all the Nordic and Germanic retirees buying 2nd homes, or all of North Africa and the Middle East and Latin America migrating to the sclerotic economy of Spain, there will never be enough feet on the ground to occupy the bedrooms on the ground.

From 1991 to 1994, and again from 1995 to 1997, Japan's Federal government financed bridges to nowhere and vast condo complexes in the rural areas of the country in hopes to increase economic activity and lower the cost of housing.

Most of those condo projects are today, 15 years later, STILL UNOCCUPIED and are falling apart from lack of maintenance.