Euro debt crisis: Is Spain the new Greece?
Spain has become the focal point for Europe's debt crisis. But Spain isn't Greece. It's better – and worse.
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Spain's housing prices soared more than 50 percent between 2002 and 2007 in Spain, twice the US gain, according to the International Monetary Fund. Only Iceland, a nation that defaulted early on in the debt crisis, saw a higher increase. Now those housing prices are crashing, pushing hordes of homeowners into insolvency along with the banks that financed their mortgages.Skip to next paragraph
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It's the parlous state of these mortgage loans that has markets worried. The total debt exposure of Spanish banks is an estimated €2.4 trillion, or about 230 percent of its GDP. That's a huge burden anytime, but it is especially difficult now when the Spanish economy is contracting. Recession means fewer jobs. Nearly a quarter of Spaniards are already unemployed – the worst unemployment rate in the euro zone – and the more workers that are thrown out of jobs, the harder it will be for them to make their mortgage payments.
When the US faced the initial fallout from the bursting of its housing bubble, the federal government stepped in with a huge stimulus package. Spain's new prime minister, Mariano Rajoy, is doing the opposite. He's pulling government money out of the economy by reining in Spain's deficit spending from 8.5 percent of GDP back to 5.3 percent.
In reality, he has little choice. The EU has demanded austerity before it will step in and help. But it might be demanding too much austerity. If the economy contracts too much, then its banks will be in a worse situation, causing even more jitters among buyers of Spanish debt because the government might be forced to step in and bail out troubled banks.
"Regardless of where you are in the economic cycle. you have to address the issue of lack of growth in the peripheral area," says Mr. Tran of the Institute of International Finance. "Cutting the deficit alone is not sufficient, particularly in the countries suffering from recession."
But that help would have to come from the EU or the ECB, neither of which so far has been willing to commit the type of resources that would be needed. The EU's firewall is not big enough to handle a default the size of Spain. The ECB has so far shown an unwillingness to make new purchases of government debt.
Spain's job is twofold: rein in its deficits and restructure its labor rules to make its workforce more competitive, says Mr. Zandi of Moody's Analytics. "That isn't going to happen without help" from the rest of Europe.
Some analysts are critical of the moves that Europe has made so far. "They're not adopting sound policies that are putting the system back on a sound basis," says Robert Carbaugh, professor of economics at Central Washington University in Ellensburg, Wash., and author of "International Economics" a textbook in its 13th edition. "It's a series of Band-Aids."
But others are more sanguine that Europe's moves to solve the crisis, even if by fits and starts, will pay off. "They have to go through this process. They can't make these changes without the angst of investors – they need the angst to maintain the pressure," Zandi says. "I think they'll figure it out."