"The kings bring us more debt"

By César Augusto Miralles This week we have learned very negative news for Spain. To the economic losses derived from the tremendous devaluation of the Venezuelan bolivar is added the declaration of HSBC (a large British bank) putting in check ...

January 15 2010 (04:31 WET)
By César Augusto Miralles
This week we have learned very negative news for Spain. To the economic losses derived from the tremendous devaluation of the Venezuelan bolivar is added the declaration of HSBC (a large British bank) putting in check ...

This week we have learned very negative news for Spain. To the economic losses derived from the tremendous devaluation of the Venezuelan bolivar is added the declaration of HSBC (a large British bank) putting in check the level of credit solvency of Spain, the report of the Economic Studies Service of BBVA advancing that the unemployment rate increased slightly in the fourth quarter, and the article of the prestigious magazine The Economist pointing out that housing in Spain is overvalued by 55%. News, all of them, that scare away investors and worsen access to financing for the public sector, companies and Spanish families.

2010 will be a very hard year not only for people in unemployment or for companies at risk of bankruptcy but also for the public sector as a whole, especially for autonomous governments and local corporations (councils and municipalities). Both face an unprecedented drop in their income. The former must maintain essential public services (health, education, social services, justice and security) while the latter must maintain basic municipal services (socio-health centers, social assistance, garbage collection, sewerage, lighting, parks and gardens, police?).

Given the resistance to reduce public spending, public debt levels will grow spectacularly during 2010, reaching unprecedented levels. If we take into account that revenues are lower than last year, maintaining the aforementioned services will only be possible if external financing is sought. Therefore, it is essential that investors (both national and foreign) consider the Autonomous Community of the Canary Islands as a safe value to deposit their savings in exchange for a return. An adequate assessment by investors will not be enough since the Canary Islands compete to attract financing with the rest of the autonomous communities (Andalusia, Basque Country or Catalonia), the State itself, the rest of the countries or the rest of companies or banks with external financing needs.

The cost of indebtedness (whether through loans, credit policies or debt securities) will be higher as indebtedness grows (with decreasing revenues) and rating agencies rate governments and companies as less secure values and in the medium term as the economy (and therefore the Euribor) recovers. Therefore, I call for a deep reflection among politicians and social and economic agents.

Governments have several alternatives: reduce spending, raise taxes and/or increase indebtedness. We must not forget that at some point investors will close the tap of credit to the public sector and that the cost of debt will have to be paid by all taxpayers (and descendants) via taxes. If we consider that tax increases are counterproductive and that the collection of the public sector will not grow significantly during the next years, we only have one possibility left: tighten our belts.

By César Augusto Miralles

Doctor in Economics from the University of Frankfurt

Most read