Gonzalo Lira has written on his blog that he believes Spain will exit the euro. The Spanish PM Rajoy saw how unpopular the previous government became as a result of how badly they handled the economy and with so many debt auctions coming up this year after the recent one went so badly, politically Rajoy will look to exit the euro this year. He also makes the point that Germany will not want to have to pay for a Spanish bailout.

Unemployment to rise to possibly 30%.

Spain’s GDP in 2011 was €1.05 trillion (US$1.33 trillion). In 2012, as previously mentioned, the general consensus is that it will shrink by between 1.5% and perhaps as much as 2.5%; a figure of –1.75% seems reasonable. Unemployment in Spain is 24%. Youth unemployment (under 24 years old) is a shocking 53%. Both figures will rise during 2012 as the economy continues to contract. An unemployment of 30% by year’s end is within the realm of the possible.

Debt to rise.

Total government debt is projected to be 79.8% of GDP in 2012—that is, €800 billion. Much more troublingly, the debt last year was “only” €680 billion—but that was still 21% higher than in 2010. So at this rate—assuming the status quo remains unchanged, and without factoring in the contraction of GDP—in 2013 the projected Spanish government debt could well rise to 90% of GDP. Private debt is an additional 75% of GDP—and let’s not even start talking about the delinquency rates—while the banks have a capital shortfall estimated at a mere €78 billion.

Huge mountain to climb for Spain in bond auctions this year.

Last week, April 4, Spain’s Treasury held a bond auction—and fuck-all was it nasty: Of the expected €2.5 to €3.6 billion, Spain barely managed to get bids for €2.6 billion—and the yield on the 10-year spiked to 5.85%, before settling at a still-way-high 5.75%.

Worldwide markets all got down on this auction—

—but here’s the thing: Spain has a lot more of these auctions coming up—on average one every two weeks.

They have to raise €186 billion in 2012.  And of the first of these, they had a quasi-failed auction. One hundred eighty-six billion euros—in less than a year. They’re not going to raise that kind of money—simple as that. The April 4 auction was not an outlier—it’s what’s in the post for all of the next 17 auctions.

Germany has no interest in saving Spain.

And the Germans—being the passive-aggressive dicks that they are (my maternal grandmother is German-Danish—so I know whereof I speak)—will not allow the ECB to open the money spigot to Spain. Just like they did with Greece, Germany will dither, while all the while blocking money to Spain until it’s too late.

Germany is thinking—in its passive-aggressive way—that it can string Spain along (just like it did Greece), and then save Spain at the last minute (just like Greece was sort-of saved).

But there’s one difference: Spain is bigger—much bigger—than Greece. You can’t pull an all-nighter and save Spain like they did Greece. You want to save Spain, you best be starting now.

Of course, they’re not.

Luís de Guindos is the technocrat running the budget, but is unlike the other technocrats, Draghi, Monti and Papademos, he is more Spanish focused and with Rajoy, they are more inclined to focus on saving Spain than being good european lapdogs.

The new Spanish government of Mariano Rajoy, who took office this past December, has entrusted the running of the country’s finances to a so-called “technocrat”, Luís de Guindos.

But de Guindos is not a europhile-technocrat-insider à la Mario Monti or Mario Draghi or Lucas Papademos or Cristine Lagarde: De Guindos is a private sector nationalist. He is Spanish—not European.

Coupled to that the fact that, ever since Franco’s time, Spain has never been fully accepted as “European” by the rest of the continent.

Now, de Guindos isn’t stupid. Rajoy isn’t stupid. An unemployment of 24%—and rising—coupled with a shrinking GDP is a recipe for political turmoil. That’s polite-speak for “political shit-storm in the making”.

There have been massive demonstrations in all the major cities in Spain—and there will be more, without question.

Rajoy realizes he is only in power because the electorate were so unhappy with previous government.

He’s under no illusions that the Partido Popular didn’t so much win in 2011: Rather, the Rodríguez Zapatero’s PSOE lost, because of popular discontent with the economy.

Rajoy will exit the euro under these circumstances and blame the euro and the Spanish people will support such a move.

If there are another couple of failed auctions of Spanish bonds, and the message from the Troika is clearly that they won’t turn on the printing presses to save Spain—or worse, if the Troika telegraphs the message that Spain is going to have to get down on bended knee and beg and plead, while simultaneously squeezing its population ’til they scream—then rather than continue to cut services and social spending and appeasing the Troika, Mariano Rajoy will exit the euro.

“Don’t blame it on me! Blame it on the euro!” will be Rajoy’s slogan—and his people will believe him. In fact they will get fully behind him, regardless of the short-term (12-18 month) pain.

Once Spain go back to the peseta, it will be easier to devalue the currency.

For Rajoy and de Guindos, it will be simpler to exit the eurozone, go back to the peseta, and devalue by 20% to 30% right off.

It is always easier for a politician to cut expenditures via devaluation than via nominal spending cuts. Since the Eurocrats won’t allow a 20-30% devaluation of the euro, and since Spain cannot really cut any more or find any more money in the bond markets, then the only thing left for it to do is devalue a currency that it controls:

The New Peseta: Coming to Spain before the end of the year.


Further Reading: