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The Spanish defense ministry is renegotiating 26 billion euros in arms contracts that the ministry just cannot pay. This budget hole adds to the country’s troubled finances, as it tries to assure investors that it is safe.

Up to now, the central government in Spain got good markets for its budget discipline and for the steps it took. The blame mostly fell on the regional autonomous governments, the “Comunidades”. But now also the federal government in Madrid has issues.

According to El Pais, these contracts regarding tanks, fighter jets and frigates were made in the past and cannot be paid for now. These are weapons bought by the previous government in an ambitious plan to modernize the army.

The high maintenance costs of these weapons weren’t taken into account, weighing on the defense budget. In addition, the army sold barracks in the good years of the real estate boom. Those days are gone and so is this source of income.

Spain’s defense minister, Carme Chacon, was a possible candidate to replace PM Zapatero as head of the socialist party (PSOE). She withdrew from the race after the party severely lost the regional elections on May 22nd.

Italy Struggling as Well

Italy is also struggling with efforts to reduce its budget deficit. Finance minister Tremonti presented front loaded austerity measures. Anger is growing in Italy, as many people feel that these measures were dictated by the ECB.

The debt crisis in Italy and Spain is far from over, despite the serious efforts made by Trichet to stabilize bond markets – efforts that the ECB was reluctant to do, but prove successful.

Further reading: Euro printing Landing in Europe.

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