Eurozone Crisis Roars Back to Savage Spain

The Eurozone has deeply entrenched economic, financial and political problems. While all the attention used to be on Greece, it’s now on Spain. Will Spanish debt woes spiral out of control? Can they be contained?

Spain (Photo credit: robynejay)

Spain is the fourth-largest Eurozone economy and the 12th biggest in the world. At first blush, Spain’s finances don’t look too bad, with national debt at 68% of annual GDP. Yet Spain has a vast stash of private sector debt, and global bond markets realize that a big slice of those liabilities could land on the government’s balance sheet.

Total private sector debt in Spain is almost 300% of annual GDP. With property prices 30% to 40% down on their 2007 peak, swathes of non-performing loans lurk on the balance sheets of Spanish banks. Spanish sovereign debt is relatively low, but so was Ireland’s before Dublin was forced to find vast sums to prop up the country’s bloated banks.

The Irish stood behind their banks. Spain won’t, but to prevent a wave of defaults and social unrest, of lot of Spanish private debt, sooner or later, will be socialized.

That means a new wave of spending cuts, and Spain is already hurting badly. Unemployment hit a record 24% in March, the highest in the industrialized world and more than double the 10% EU average. Almost half of Spain’s young people are unemployed. New laws making made it easier to cut wages and lay people off resulted in a general strike, which became a national demonstration. The protests became violent.

Now Spain has tipped into recession, with GDP shrinking 0.3% in the first quarter. As the economy slows, tax revenues fall and welfare payments rise. Public debt will hit 80% of GDP by year-end. That’s before any systemic panic, which would see droves of private debtors throw themselves on to the state.

Spain’s 10-year bond is hovering around 6%, in the danger zone that sparked bailouts elsewhere. The prospect of another Eurozone bailout, far bigger than Greece’s, looms. Spain must repay a €11.9 billion bond on April 30, and another €12.8 billion loan in July. If investors refuse to finance this repayment, what happens next? Can a bailout for Spain be afforded? Where does this madness end?

To read Liam halligan article: Eurozone Crisis Roars Back to Savage Spain

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Tagged as: European sovereign debt crisis, European Union, Eurozone, GDP, Greece, Gross domestic product, Spain, Spanish Banks