Spain’s Death Spiral and the Hypocrisy of the Euro []

Link to original article, April 5, 2012,

… The austerity drive is failing to achieve what it aims to do: improve Spain’s financial position and rebuild investor confidence. Instead, investors have been spooked by the deterioration of the Spanish economy. Demand for Spanish government bonds was weak in a Wednesday auction. Since the government announced its latest austerity budget, yields on its bonds have risen, a sign that investors see them as riskier. Yields on 10-year bonds jumped over 5.6%, the highest since January. And why is that? Well, by tanking the economy, the austerity measures are making Spain’s financial standing weaker, not stronger. Despite its new austerity budget, Madrid estimates that the government-debt-to-GDP ratio will INCREASE in 2012, to nearly 80% from 68.5% in 2011. Simply put, Spain is moving backwards.

Let’s say, for example, we have a country with a GDP of $100 and government debt of $100. So it has a government-debt-to-GDP ratio of 100%. Now let’s say we want to reduce that ratio to 90%. We can achieve that two ways. We can reduce the amount of debt to $90. But if the economy is shrinking, we’d have to cut even more debt to cut the ratio. Let’s say GDP contracts to $90. That means we’d have to cut debt to $81 to meet our 90% target. Now let’s flip our math around a bit. We can get to our 90% ratio by increasing GDP to about $111, without cutting the amount of debt at all. Growth can fix a nation’s financial position just as well as austerity. Preferably, a country like Spain would stabilize its finances with a mix of both.

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