Christian Debt Recovery

European Debt Crisis Spain

January 29th, 2008 |

Author: Gavin

european debt crisis spain

The 2010 Euro debt crisis and its effect on Spain

Many economists have recommended the imposition of a battery of corrective policies to control public debt- such as drastic austerity measures and substantially higher taxes. Although rising rapidly with the onset of the crisis, Spain’s public debt at the beginning of 2010, as a percentage of GDP, was still not high by European standards. However, commentators became concerned that the central government has little control over the spending of the regional governments. Under the shared structure of governmental responsibilities that have evolved since 1975, much responsibility for spending had been given back to the regions without also handing over the responsibility of raising the required taxes. The central government now finds itself unable to gain support for unpopular spending cuts from the recalcitrant regional governments.

Spanish banks are directly linked to the construction and real estate sector, which collapsed when the Spanish housing bubble popped. These sectors have outstanding debt equal to 45% of the country’s GDP (imagine if the U.S. subprime crisis had been worth more than $6 trillion rather than “merely” a few hundred billion or so). Add a global recession and a 20% unemployment rate and you can see why people are worried about these banks’ mortgage exposure.

Local savings institutions own more than half of all Spanish mortgages. These “cajas” are semi-public institutions with a mandate to reinvest half of their annual profits in local social projects. Political elites use these funds to return favors, making this system great for public officials but bad for creating stable banks. Reform of the system is unlikely as it would deprive local officials of a valuable bonus for their public service. All things considered, then, it is not surprising that Spanish banks are being denied interbank loans by many of their European peers and thus must hit up the ECB instead. But here’s why Spain is no Greece. On May 23, 2010, the government announced further austerity measures, consolidating the ambitious plans announced in January.

Recovery

The central government has to borrow €97 billion this year to finance a €553 billion national debt. The increase in borrowing costs could complicate Spain’s effort to progressively lower its deficit down from 11% last year, to 9% by the end 2010, and back to within the euro zone limit of 3% by 2013. (The Wall Street 2010)

GDP grew 0.1% in the first quarter of this year, ending seven consecutive quarters of contraction but lagging the rest of the euro area’s recovery by six months. (Guardian 2010)

Spain confirmed its timid recovery from recession on Friday with 0.2 percent growth in the second quarter. On a year-on-year basis, Spanish Gross Domestic Product still shrank 0.2 percent but this was better than the contraction of 1.3 percent in the first quarter, the (INE) said in provisional data. The government predicts the economy will contract 0.3 percent in 2010 and then expand 1.3 percent in 2011. The government is also pushing through an overhaul of the labor market that will make it easier and cheaper for employers to dismiss workers in an effort to tackle an unemployment rate that has hit 20 percent, the highest in the euro zone. (Yahoo 2010)

References

Pablo Dominguez (2010, June 15) Spain says banks in credit crunch [online] Available: online.wsj.com [2010, August 14]

Katie Allen (2010, May 7) Spain scrapes out of recession after seven quarters [online] Available: guardian.co.uk [2010, August 14]

(2010, August 13) Spain confirms timid economic recovery [online] Available: news.yahoo.com

Jon Markman (June 21, 2010) Euro Crisis Investment – The Pain in Spain Subsiding Spain is different than Greece – and here’s why [online] Available [2010, August 13]

Nick Fletcher (28 April 2010) Debt crisis: European markets fluctuate as financial turmoil spreads to Spain [online] Available:[2010, August 12]

Michael Schuman (June 18, 2010 ) Will Spain face a debt crisis? [online] time.com [2010, August 13]

Cliff Wachtel (16 June 2010) The Latest EU Debt Crisis: Now 3 Reports Spain Seeking Aid [online] uk.ibtimes.com [2010, August 15]

About the Author

Ems_salehi64@yahoo.com

mehrdad.salehi64@gmail.com

Bust: Greece, the Euro and the Sovereign Debt Crisis (Bloomberg (UK))

$15.31

In 2001, Greece saw its application for membership into the Eurozone accepted, and the country sat down to the greatest free lunch in economic history. However, the coming years of global economic prosperity would lead to unrestrained spending, cheap borrowing, and a failure to implement financial reform, leaving the country massively exposed to a financial crisis—which duly struck. In Bu…

Democracy and Debt – The European Debt Crisis

Europe is in crisis. As the leaders of France and Germany scramble to create one solution after another, the Euro is on the brink of collapse. Greece, Portugal, Spain, Ireland, Italy all of debts they cannot repay, and government bond interest rates have dramatically increased as bankers fears of sovereign risk and national debt default increase with every crisis and every failed solution.European…