Unfinished Business in Madrid : Spain’s Economy Falters as It Struggles to Meet Strict Maastricht Requirements

The twin skyscrapers that lean like modern towers of Pisa at the Plaza de Castilla here were supposed to be the city skyline’s architectural signature--bold monuments to the nation’s prosperity.

But on closer inspection, their naked steel girders betray a billion-dollar bankruptcy and a boom decade gone bust.

After years of record growth, Spain is suffering its worst economic crisis in a decade. The national economy is faltering, financial scandals clog the courts and pessimism prevails.

Construction on the controversial office towers halted in mid-December, when the real estate and construction companies behind the project suspended payments to creditors. Both are subsidiaries of Grupo Torras, Spain’s largest holding company and the bankrupt Spanish arm of the troubled Kuwait Investment Office.

Grupo Torras suspended payments Dec. 4, citing $2.15 billion in debts, and its new managers have accused their predecessors of falsifying documents, fraud, price-fixing and other irregularities that led to the collapse of the group, which has large holdings in real estate, paper, fertilizers and chemicals.

The largest bankruptcy in Spanish history has highlighted painful weaknesses in the nation’s economy: factories that cannot compete with European counterparts, soaring unemployment, persistent corruption and, some say, an investment-hungry government that was sloppy in its regulatory duties.

“The government wasn’t paying attention to something it was investing in daily,” said Luis Gamir, an economist at Madrid’s Complutense University and a top policy adviser to the conservative Popular Party, which has seized on the KIO debacle as an election-year campaign issue.

“There should have been a certain vigilance,” especially since the investor was effectively the Kuwaiti government, Gamir said. Spanish law requires careful evaluation and regulation of investments by foreign governments.

Kuwaiti Emir Jaber al-Ahmed al-Sabah set up KIO in the 1950s to parlay his nation’s oil wealth into diversified foreign holdings that would guarantee financial security for future generations of Kuwaitis when oil revenues dry up.

KIO’s worldwide empire had estimated assets of $80 billion at its height, but apparent mismanagement and costs related to the Gulf War have reportedly cut that figure to $15 billion.

Already, Grupo Torras’ bankruptcy has forced its Ercros industrial chemical unit to close five of its 14 factories, laying off 1,900 workers.

In a country whose unemployment rate tops 20%--twice the EC average--the layoffs could not have come at a worse time.

In January alone, there were more than 62,000 layoffs nationwide, and a record 3 million Spaniards are now out of work, according to official estimates.

The construction industry has been especially hard hit. After years of frenetic preparation for the Barcelona Olympics and the World’s Fair in Seville, the massive public and private investment in new highways, a high-speed train, hotels and other projects has slowed dramatically.

High-profile projects such as the KIO towers in Madrid and several hotel/office complexes in Barcelona remain unfinished, stark monuments to a real estate bubble that finally burst.

Spain’s economic difficulties are not unique among its European neighbors, all of whom are suffering to varying degrees from the global recession. But Spain’s leaders have little room to maneuver as they struggle to meet the strict requirements to join the European monetary union under the 1991 Maastricht Treaty, especially with the burden of chronic unemployment.

The 12 EC Nations must by 1996 meet goals on such economic matters as the rate of inflation, deficits, debt, exchange rates and long-term interest rates.

Without naming Spain, EC President Jacques Delors said earlier this month that unemployment should have been another criteria under Maastricht.

That would probably have been insurmountable for Spain, which so far has been able to meet only one of the goals established by Maastricht: keeping the national debt under 60% of gross domestic product.

Controlling public spending has proved to be particularly difficult for the socialist government, which has held power since 1982 but is facing a growing threat this year from the Popular Party.

Spain’s annual growth--on average, 3.38% from 1982-1991--was accompanied by sharp rises in the nation’s budget and trade deficits, the result, in part, of infrastructural investments necessary to compete with the rest of Europe, a newly affluent population hungry for consumer goods and high interest rates to attract the necessary capital.

Paradoxically, the high interest rates that attracted foreign capital eventually slowed domestic investment in industrial modernization. Consequently, home-grown success has been somewhat elusive; only 21 publicly traded Spanish companies made the Financial Times’ 1992 list of Europe’s 500 most important companies.

But there were real and lasting gains during the boom.

Between 1981 and 1991, per capita income in Spain more than tripled in real terms to 1,244,482 pesetas, or about $11,300. The country’s average GDP growth outstripped that of its neighbors, and a network of modern highways now links a country whose system of communication had been woefully inadequate.

“In the 1980s, Spain invested a lot in infrastructure. We must continue to invest,” said Miguel Fernandez de Pinedo, president of the accounting and consulting firm Price Waterhouse in Spain.

“Avoid investment now and the country will pay for it in years to come,” Fernandez de Pinedo said. “To control spending too much is to mortgage the future.”

When the economic climate improves internationally, Spain’s growth will again outpace that of its neighbors, Fernandez de Pinedo said.

“The rest of the crisis is the (ailing) world economy,” he said.

In presenting an assessment of Spain’s 1992 economic performance to reporters two weeks ago, Finance Minister Carlos Solchaga acknowledged that “there is a painful adjustment going on.”

But Solchaga, a key architect of Spain’s recent economic policies, dismissed government critics as too pessimistic in their long-term outlook.

“The period of crisis we now confront is much less severe than the one we faced at the beginning of the 1980s,” he said.

“Time has to pass for people to become convinced that the economy has improved.”

Apparently, time is passing slowly for the common Spaniard; a recent poll found that 70% of Spaniards consider their country’s economic situation to be grave, and getting worse.

Widespread pessimism grows as newspapers daily reveal more evidence of apparent corruption in the KIO case and other scandals involving political figures.

When computer disks containing KIO’s Spanish transaction records were stolen from government offices recently, it was seen as further evidence of bungling by bureaucrats whose economic management was already suspect.

With fall elections approaching, polls show Spaniards are worried about their wallets and wondering who can restart the sputtering economic engine they believed was going to carry them to a united Europe. The boom of the 1980s is clearly over, and its echo has faded away. Indicators now suggest a period of retrenchment and uncertainty, and it may be 1994 before Spaniards hear any whispers of renewed prosperity.