Spain’s public debt stood at 1.062.472 trillion euros at the end of September, representing 99.4% of GDP, and compared with the government’s full-year 2015 target of 98.7%.
Against this backdrop, the Treasury sold 3.507 billion euros of bonds and debentures at its latest auction, reducing the interest rate applied to record lows. So much so that the average cost of Spain’s debt stood at 0.87% at the end of October, compared with 1.52% in December 2014.
Although all of this is just a fiction and the result of ECB President Mario Draghi’s commitment/threat, it is certainly the case that Spain has stopped repaying two-year loans at 6% in 2012, at the height of the financial bailout, and is now currently charging its creditors.
With these levels of public debt and the drop in the cost of financing this, it begs the question to what extent is Spain’s debt level really a big burden? Especially if we take into account the close link between public deficit and public debt, and that, at the very least, it shows there is a structural problem as spending is exceeding income, which leads us to a desideratum of undesirable consequences.
As the classics show, indebtedness is not such a bad thing, provided there are assets which can be liquidated or sufficient cash flow can be generated to pay off the debt’s principal and interest.
The data shows that Spain’s public debt is in line with levels in neigbouring countries, equivalent to the average level in the EU, but lower than countries like France or Italy, althougth the structure of the debt is not comparable. Let’s not talk about Japan, where debt is over 2.5 times GDP.
In this context, Spain’s problem is generating cash flow to pay its debt. And here the experts highlight two weak points: the black economy and tax fraud, and unemployment. In the first case, the impact on public debt represents over 20% of GDP, a percentage which eats up a substantial amount of the State’s revenues for reducing the deficit or issuing less debt. As far as unemployment goes, analysts are of the opinion that this is an obstacle to generating cash to meet the payment of private debt. This is largely mortgage debt, given the Spaniard’s cultural preference for owning a home rather than renting one.
In short, debt is an instrument which every country uses, irrespective of its solvency, and the problems arise when this instrument is abused and debt levels are unsustainable.