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The Vanguard of Disaster

13 minute read
Lisa Abend / Jerez de la Frontera

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.”

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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.”

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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.

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Nowhere are the effects of these problems more evident than in the southern city of Jerez de la Frontera. With its flamenco and its sherry, its whitewashed houses and flowering balconies, Jerez is that most Spanish of cities, a guitar-strumming, dark-eyed Andalusian fantasy. But these days, it embodies Spain’s markedly less romantic side. With 211,000 inhabitants and €1 billion in municipal debt, according to local government sources, it is, per capita, the most indebted city in the country. In absolute terms, only Madrid, with a population of 3.3 million, owes more. Its bills go unpaid, its public services are disappearing, and unemployment in the province is mainland Spain’s highest. The municipal government, also controlled by Rajoy’s Popular Party, has responded by drastically slashing its expenses and freely admits it cannot begin to think about restoring growth until it has managed to chip away at the monumental debt. “We are a beautiful city with lots to offer, but these days what we’re primarily known for is the crisis,” says David Fernández, editor of the local newspaper Diario de Jerez. “Jerez is the vanguard of disaster.”

Vanguard and portent. Economic decline in the city began earlier than in the rest of Spain, when the area’s critical wine industry began to flag in the late 1990s. Yet for years the impact of that decline was masked by Spain’s boom, and revenues lost from one departing industry were replaced with the country’s favorite panacea: construction. As it did everywhere in Spain, municipal spending grew — and city payrolls with it. When the Popular Party took power in June 2011, it discovered not only that the local government was €1 billion in debt but also that it was going to remain in debt for a very long time. “There was no liquidity,” says Antonio Saldaña, deputy mayor and city spokesman. “The previous government had racked up debts that would consume all our income until the year 2023.”

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Hence the drastic measures. Citing a bloated payroll — Jerez’s town hall currently employs 1,900 people directly and another 600 indirectly — Mayor María José García-Pelayo announced plans at the end of March to cut 390 jobs. She has not paid direct municipal employees in nearly three months; indirect ones — people who work for companies contracted by the city — have not been paid in five. And once city hall catches up on its back payments, salary freezes and early retirement are on the horizon for many public employees. Inma Sánchez (no relation to Marisa) is one of them. A home health care worker, she helps man the makeshift tent festooned with angry banners that she and her colleagues erected as a permanent protest outside city hall after they stopped getting paid. The rest of the time, a sense of responsibility compels her to show up for work. “I take care of people who are confined to their beds,” she says. “We give them medication, we bathe and feed them. If we don’t go to work, they don’t survive. How could we possibly quit?”

Sánchez, who protests in her scant spare time, is living on fumes. With no paycheck since January, she relies on the €400 she receives in alimony for her two daughters, on her credit cards and on a one-year reduction in her mortgage payments that she negotiated with her bank. When the big spring fair launched recently, she took a job at one of the bars in the hope that the extra money would buy her and her family another month or so. “And that’s it, my whole survival plan,” she says. “I don’t know where this ends.”

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No one in Jerez does, which is why the sense of desperation worsens by the day. Schools have closed for weeks at a time because there has been no one to clean them. Street lighting has gone out repeatedly because municipal electric bills went unpaid. Only the main branch of the library has electricity, so any studying has to happen during daylight hours. Cáritas, the church-run Catholic charity, has seen attendance in its job-training programs and at its soup kitchen skyrocket. “It’s been brutal,” says director Francisco Domouso. “And what you notice is that the growth all comes from a level of society that never before was associated with taking charity.”

Add to those woes an almost complete collapse of public transportation. Until May 11, Jerez’s urban bus drivers had been on strike for 13 weeks because the company they work for suspended payments and its administrators left the city. Labor agreements were supposed to guarantee at least 19 buses circulating each day (down from the 60 that normally run), but with no one around to pay for the supplies necessary for maintenance — let alone the mechanics — even those few were frequently out of service. It was only recently, when the city moved to assume control of the buses from the subcontractor, Urbanos Amarillos, that service resumed.

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For months, the men and women meant to be driving those buses instead held a daily protest march at 10 a.m. to the sound of banging drums, following on foot the routes they used to make behind the wheel. Jaime González was one of them, and as he brought up the rear one day in mid-April, he avoided eye contact with the pedestrians who glared as the procession passed. “Nobody wants us to work more than we do,” he said.

With two children to support, González was feeling the pressure acutely. His wife works on an on-call basis in a public hospital, but lately she hasn’t been getting many shifts. His 9-year-old son has already adjusted to his family’s predicament and will sometimes point out a cheaper brand when he accompanies his father shopping. González has been forced to rely on financial help from his siblings. “So far,” he says, “we’ve managed to keep up with our bills.”

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In fact, family support appears to be the only thing keeping Jerez’s citizens afloat these days. “It’s almost expected now for young people in their 20s and 30s to stay at home and live off their parents,” says José Maria Trillo, secretary general for the Jerez branch of the labor union Comisiones Obreras. “But we’ve got people here in their 40s and 50s living off their retired parents’ pensions.” Or even their children’s income: after losing his job as a tractor driver two years ago, Manuel Medina pays his rent only with his daughters’ help and the few euros he makes each day selling garlic collected in the fields outside town. “I never expected to be in this situation,” he says.

A Bleak Tomorrow
For now, the government’s response to the suffering is to ask for patience. The city expects to be able to pay back wages in June, when tax revenues begin to flow in. And it is trusting the central government to fulfill its promise to pay municipal suppliers in cities where the local government can’t. But it makes no apologies for policies it believes are as necessary as they are painful. “It’s like a boat that’s sinking,” says Deputy Mayor Saldaña. “We can keep everything the way it’s been and let it sink. Or we can make the decision to lighten the load, even if it’s painful, because that’s the only way to keep the boat afloat.”

It takes only a short walk through Jerez, though, to realize that simply getting rid of extra weight won’t solve the problem without growth. There’s hardly a block in the center without retail space standing empty, and unemployment in the city currently tops out at 36.37% — and that’s before those 390 people are let go from city hall. More unemployment means less money for consumers to spend on local businesses and lower revenues for the city government. It’s a death spiral.

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Even if the bleeding is stanched, the question remains: How will Jerez — and Spain — ever return to anything like healthy economies? At the end of April, German Chancellor Angela Merkel announced she would present an agenda for growth at the European summit in June, and François Hollande’s victory in France — as well as recent election results in Germany and Greece — suggests that Europe as a whole may be turning away from the path of pure austerity. Within Spain, Prime Minister Rajoy issued a new package of financial reforms on May 11 and prepared to inject public money into Spain’s banks in order to loosen up credit. But with investors fleeing Spain, reversing the country’s fortunes is going to require more than rhetoric and a few resolutions.

While Brussels and Madrid discuss what is to be done, Marisa Sánchez wakes up every morning worrying if her family will have food the next day and if they’ll be able to hold on to their home. She has pared every luxury she can think of, freezing food for her truck-driver husband to take with him on his trips so he doesn’t have to eat out and swapping even the family’s modest tradition of a Sunday aperitif in one of the local cafés for a walk around town. With her husband’s salary and help from her retired mother, Sánchez thinks they’ll be able to make it until June, when her payments are supposed to resume. Given the mountain of debt the city still faces, she knows there are more painful months ahead. But it’s the years that really worry her. “Sometimes,” she says as she heads back into her lonely ticket booth, “I think no one is facing reality.”

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