The Complete Guide To The Oncoming Spanish Debt Crisis That Everyone Is Terrified Of

With the focus firmly on the debt crises in Ireland and Portugal, the real threat is still lurking.Spain is a massive economy, the 5th biggest in the European Union, and the fourth biggest in the eurozone.

By the time and if the sovereign debt crisis spreads to Spain, the eurozone bailout fund now set up to help Greece and Ireland may be too small.

Spain, with an economy much larger than Greece, Ireland, or Portugal, may be too big to bail.

We’ve got the details on how it has come to this, why Spain can’t escape its situation, and who’s exposed to Spain’s sovereign debt.

1. Property Boom: Spain experienced a property boom larger than the US and UK

Property Boom: Spain experienced a property boom larger than the US and UK

This property boom saw the price of Spanish real estate rise 80% from 1990 to 2009.This was due to similar reasons as those for the US and UK booms: relatively low interest rates and an easy credit environment.

Source: The Economist

2. Property Boom leads to employment growth and influx of workers.

Property Boom leads to employment growth and influx of workers.

The property boom led to a period of relatively low unemployment in Spain and an influx of foreign workers and dependents from abroad.Since the boom collapsed, this influx has only served to further exacerbate the unemployment problem.

Source: Index Mundi

3. But the boom resulted in a massive bust.

But the boom resulted in a massive bust.

Image: Hedgeye

4. And now unemployment is at 20.8%.

And now unemployment is at 20.8%.

Image: Eurostat

Spain’s unemployment rate has continued to rise since the start of the crisis and is now 20.8% as of September.The European Union was 9.6% in the same period.

5. And it’s incredibly hard for Spain to create jobs…

And it's incredibly hard for Spain to create jobs...

Image: Harvard

Because of Spain’s position in the eurozone, it has been confronted with wage demands which are unfit for its less modern economy.Spain has been forced to cut jobs in order to compete, because it cannot devalue its currency. It is running out of space to create greater productivity.


6. And if Spain can’t become more competitive, than it can’t grow its export sector.

And if Spain can't become more competitive, than it can't grow its export sector.

Image: Harvard

7. And even if the euro went down in value…

And even if the euro went down in value...

Image: Hedgeye

8. It isn’t going to help much anyway.

It isn't going to help much anyway.

Image: Hedgeye

9. During the boom times, it seemed as though Spain was doing well at paying down debt.

During the boom times, it seemed as though Spain was doing well at paying down debt.

Spain, unlike Greece, used its period of growth to pay off debts and only had debt of 55% of GDP, which is the Euro zone average, prior to the crisis.This should, theoretically, make servicing its debt easier as it has less.

Source: Index Mundi

10. For instance, Spain took a slash and burn approach to pension and entitlement schemes.

For instance, Spain took a slash and burn approach to pension and entitlement schemes.

Spain has been on a slash and burn assault of entitlement programs since the severity of its recession became obvious.Most obvious of these cuts is the raising of the retirement age to 67 from 65. This, coupled with cuts in the civil service, could make a strong impact on the country’s deficit.

Source: OECD

11. But total debt to GDP remains incredibly high.

But total debt to GDP remains incredibly high.

Image: Evolution Securities

12. And private sector debt is a massive part of that.

And private sector debt is a massive part of that.

Image: Evolution Securities

13. And the Spanish real estate sector is still a real mess.

And the Spanish real estate sector is still a real mess.

Image: Banco de Espana

14. Bank exposures to Spain by country (in billions); Germany, France, UK, and U.S. highly exposed

Bank exposures to Spain by country (in billions); Germany, France, UK, and U.S. highly exposed

Image: BIS

15. More detail on those exposures point out that it’s Germany and Belgium with the most tier 1 capital at stake.

More detail on those exposures point out that it's Germany and Belgium with the most tier 1 capital at stake.

Image: Voxeu.org

16. Barclays, Deutsche Bank, and BNP has large estimated exposures to Spanish sovereign debt as of May.

Barclays, Deutsche Bank, and BNP has large estimated exposures to Spanish sovereign debt as of May.

Image: Evolution Securities

17. With the amount of funding Spain requires, there’s no way the current eurozone bailout could meet Spain’s needs if things got worse.

With the amount of funding Spain requires, there's no way the current eurozone bailout could meet Spain's needs if things got worse.

Image: Voxeu.org

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