Economy of Spain - The Euro Debt Crisis

The Euro Debt Crisis

In the first weeks of 2010, renewed anxiety about the excessive levels of debt in some EU countries and, more generally, about the health of the euro has spread from Ireland and Greece to Portugal, and to a lesser extent in Spain and Italy.

Many economists recommended a battery of policies to control the surging public debt caused by the recessionary collapse of tax revenues, combining drastic austerity measures with higher taxes. Some senior German policy makers went as far as to say that emergency bailouts should include harsh penalties to EU aid recipients such as Greece. It has been noted that the Spanish government budget was in surplus in the years immediately before the GFC and that its debt was not considered excessive.

At the beginning of 2010, Spain's public debt as a percentage of GDP was still less than those of Britain, France or Germany. However, commentators pointed out that Spain's recovery was fragile, that the public debt was growing quickly, that troubled regional banks may need large bailouts, growth prospects were poor and therefore limiting revenue and that the central government has limited control over the spending of the regional governments. Under the structure of shared governmental responsibilities that has evolved since 1975, much responsibility for spending had been given back to the regions. The central government found itself in the difficult position of trying to gain support for unpopular spending cuts from the recalcitrant regional governments.

On May 23, 2010, the government announced further austerity measures, consolidating the ambitious plans announced in January.

As of September 2011, Spanish banks hold a record high of 142 billion Euros of Spanish national bonds. December 2011 bond auctions are "very likely to be covered" according to JPMorgan Chase.

Till Q2 2012, Spanish banks were allowed to report real estate related assets in higher non-market price by regulators. Investors who bought into such banks must be aware. Such Spain houses can not sell at land value on book after being vacant over years.