Euro debt crisis: Is Spain the new Greece?

Spain has emerged as the new Greece – the focal point for the euro zone's ongoing debt crisis. This week, that crisis has begun escalating again.

On Monday, interest rates on Spain's long-term debt rose above 6 percent, a level not seen since the last flare-up of the euro crisis. On Tuesday, Spain saw its costs of short-term borrowing nearly double from a month ago. Although investors snapped up its debt issues with enthusiasm, they demanded nearly twice the return that they did a month ago. Spain's 12- and 18-month government bonds went for an average yield of 2.6 percent and 3.1 percent respectively, up from 1.4 and 1.7 percent on March 20.

If its borrowing costs keep rising, then Spain will be unable to service its debt – a squeeze that has already forced Ireland, Portugal, and Greece to seek a bailout from the European Union. But Spain isn't Greece, it's far larger. The default of the euro zone's fourth-largest economy would shake confidence in the currency in a way that tiny Greece never could.

"Spain is a much bigger threat to the euro zone itself," says Mark Zandi, chief economist of Moody’s Analytics, an economic research subsidiary of Moody’s Corp. and based in West Chester, Pa. "If Spain goes, then the entire periphery [of the euro zone] will unravel."

So far, Spain appears to be in a stronger position than Greece. It has a more solid competitive economy. It is slightly ahead in its timetable to sell €86 billion ($113 billion) of debt this year. On Thursday, Spain will auction two- and 10-year bonds, a crucial test of investors' confidence.

Another plus: While the EU and European Central Bank (ECB) still appear behind the curve in solving the region's mounting debt problem, they at least have gained more experience dealing with it.  

"The leadership has been reacting to and addressing crises in the past two years rather than being ahead of the market, but look at where they are now compared with 2010 when Greece first became a problem," says Hung Tran, deputy managing director of the Institute of International Finance, Inc. (IIF), an association of global commercial banks and other financial institutions, based in Washington, D.C. The euro zone has created firewalls to contain the crisis and signed a fiscal compact that binds nations to budget targets. "Compared with two years ago, we have the tools" to address the crisis.

While Greece's problem is whopping government debt – 160 percent of gross domestic product – Spain's government debt at the end of 2011 stood at only around 70 percent of GDP, which is below US levels and even the euro zone's average. Instead, its main problem is private-sector debt.

The collapse of a housing bubble has pushed the private sector's debt to GDP ratio to a huge 214 percent, 70 percent higher than Greece's. Of the five largest euro nations, it has by far the highest private debt ratio.

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