Spain is in trouble.
The macroeconomic outlook continues to deteriorate as unemployment rises. Angry citizens are protesting austerity in the streets.
At the same time, Spain has just unveiled its 2013 austerity budget, but the overly-optimistic macroeconomic assumptions underlying the plan foreshadow missed deficit targets in the coming quarters, which will likely force a new round of austerity measures, further worsening the economic contraction.
Meanwhile, the Spanish region of Catalonia is threatening to secede.
Technically, the "worst-case scenario" for Spain would be something along the lines of a 100 percent decline in GDP and 100 percent unemployment. No one is calling for that.
Presented here are all of the things that could go wrong, though. The recent work of Citi economists and strategists is heavily cited because they seem to be consistently more bearish on the Spanish situation than other shops.
Spain's economy experiences a deep recession in 2013
Spain's official outlook for GDP growth is optimistic – the government sees a mild -0.5 percent contraction in 2013. And the worst case scenario presented by Oliver Wyman for the Spanish bank stress tests assumes a -2.1 percent contraction.
This contrasts with much more pessimistic outlooks from economists at Citi, who see Spanish economic output contracting -3.2 percent next year.
The government misses its budget deficit targets and enacts even more austerity
Spain's budget deficit targets are based on their optimistic economic growth assumptions. However, most economists don't actually believe those assumptions will prove correct.
As a result, many warn that Spain will miss its deficit targets and have to enact yet more austerity measures that will continue the positive feedback loop wherein spending cuts deepen Spain's economic malaise.
The Spanish government is targeting a budget deficit amounting to 4.5 percent of GDP in 2013.
Citi economists, on the other hand, think Spain will miss that target by at least 20 percent and project a deficit totalling 5.5 percent of GDP in 2013.
Spain loses sovereignty while negotiating over bailouts and reforms
European leaders heralded Spain's 2013 budget as an important step for Spain in resolving its crisis – ignoring the optimistic macroeconomic growth assumptions when endorsing Spain's deficit targets.
However, as Spain seems likely to miss its deficit targets, Spain will likely have to implement a new round of austerity in an attempt to bring the budget back in line with expectations.
Citi strategist Hans Lorenzen warns, "Even if [the EU is] satisfied with the targets per se, against the prospect of slippage next year we expect core countries will want more control over implementation than Rajoy's government is comfortable with, making for difficult negotiations ahead."
See the rest of the story at Business Insider
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