Like millions of Spaniards these days, Marisa Sánchez has numbers running through her head. The regional bus company where she's worked for the past six years has slashed its routes, so during the long periods of time when she's not selling tickets, Sánchez obsesses over the figures that worry has carved into her memory €620: the cost of her mortgage; €180: her monthly car payment; €50: the bill for the electricity her family of four consumes each month. Somehow the numbers never manage to add up to zero, which is the salary she has taken home since the beginning of the year, when Jerez de la Frontera's near bankrupt municipal government stopped paying her company, and her company stopped paying her. "I keep thinking that this spiral is going to end somehow," says the 38-year-old Sánchez. "But it just keeps getting worse and worse."
So it is for Spain as a whole. After months of fragile stability, brought on in part by the election of a conservative government committed to austerity, the country is teetering on the brink once again. On April 26, Standard & Poor's warned that Spain was "very unlikely" to meet its 2013 deficit target and demoted Spanish bonds to BBB+ status, the same as those of Ireland, Italy and Kazakhstan. The following day, the Spanish government announced that unemployment had reached a staggering 24.4%, a figure that is almost certain to go higher. The banks are teetering on the edge of meltdown, the economy is contracting by 1.7% this year, and rumors of a European Union bailout are circulating once more. "The figures are terrible for everyone and terrible for the government," said Foreign Minister José Manuel García-Margallo in an interview with national radio on April 27. "Spain has experienced and continues to experience a crisis of tremendous proportions."
As long as Spain's crisis continues, so does Europe's. Spain is the E.U.'s fifth largest economy, and a bailout of its sovereign debt would not only require significantly more money than was needed for the attempts to rescue Portugal or Greece but would also carry an even greater risk of contagion, especially to the fourth largest economy, Italy. Spain's latest tailspin began in March, when the new Popular Party government led by Prime Minister Mariano Rajoy admitted that its deficit was higher than the European Commission expected and that it would not meet its new deficit-reduction target of 4.4%. After the commission sent inspectors to Madrid to evaluate the numbers, Rajoy began cutting even more. In the past three weeks, his government has announced that it would raise university fees, require co-payments for medical visits and, most recently, raise the value-added tax, breaking Rajoy's campaign promises.
Yet the evidence is growing that austerity isn't working and may only be making the problem worse. On May 14, Spain's 10-year bond yield zoomed past the danger line of 6%, the level at which Greece required a rescue. "There's a serious lack of credibility," says Barcelona-based economist Edward Hugh, an adviser to the Spanish bank Caixa Catalunya. "And the proposals so far haven't convinced anyone least of all investors."
A Spanish City's Pain
The story of Spain's economic crisis is all too familiar: cheap credit, a housing bubble, an economy too dependent on the construction and real estate industries. It all came crashing down in 2007. But if Spain is suffering as much as Portugal, Greece and Ireland, the causes of its ongoing problems are quite different. Sovereign debt is worsening but, relatively speaking, is not that bad. Last year debt reached 68.5% of GDP, compared with 165.3% in Greece. Instead, the current troubles stem from the instability of Spain's banks and the country's persistent failure to grow, both of which have deeply undermined investor confidence. "In Spain, public debt is rising uncontrollably now because the economy is bust," says Hugh. "That's very different from, say, Greece, where the economy is bust because government debt is rising uncontrollably."
A banking sector poisoned by toxic assets is the primary cause of Spain's current weakness. By the first week of May, the country's fourth largest bank, Bankia, had requested partial nationalization, and several more financial institutions are expected to require public funds if they are to sanitize their accounts. But there are other strains worsening Spain's financial health. Efforts to impose austerity and enact comprehensive fiscal reform have been stymied by a political system that divides power between Madrid and the country's regional and municipal governments, setting them at odds with one another. Overspending in those regions especially in Catalonia, Madrid, Andalusia and Valencia (which on May 4 had to refinance its €500 million debt at 7% interest) made up a third of Spain's overall 8.5% deficit in 2011. Rajoy's government recently guaranteed a €35 billion loan program that would help indebted municipalities and regions pay back their subcontractors another reason public debt is expected to reach 80% by the end of the year.