EUROPEAN DEBT CRISIS – CASE STUDY: SPAIN

Not too long ago, Portugal, Spain and Ireland were illustrations of the European Union’s success. Those countries represented the biggest economical potential in the euro zone. Today, they are the European countries that are facing the biggest economical issues. Italia and Spain are the next “black sheeps” of the euro zone after Greece. To prevent any downfalls of one of those economy, which would automatically lead to a global financial crisis, the European Central Bank has to take preventing actions. 

Before 1986, PIGS had many similarities, characteristics of underdeveloped countries, like its neighbors in North Africa: poorly designed road network,  agriculture and tourism economies, uncompetitive industries, high unemployment, living standard a lot below the European average. Entering the European Union will mark a small turning point for country’s like Spain: indeed, thanks to Brussels’ subsidies benefiting primarily to the poorest regions, Spain will experience an unprecedented economic boom illustrated by large-scale projects (dams, roads ….), inauguration of TVE (the Spanish bought TGV to France), rise of the national airline IBERIA (birth of several low-cost airlines ..), modernization of sports facilities, Olympic Games in Barcelona in 1992, groupe TELEFONICA expanded to become a giant multinational, Santander became one the biggest bank of World… But by 2009, Spain will be struck by two events, the end of the european subventions (already cut in 2007) and the beginning of the global economic slowdown.

Since Spain joined the European Union in the 1986, the biggest European countries such as France, Germany and the United Kingdom have invested in the iberian economy. From 1986 to 2009, Spain has received fresh money without real counterparts. This has contributed in the acceleration of its economy. Indeed, when we look back at the case of Spain, we find out that this country had in 2006 a surplus of around 18 billion euros. About 1.8% of its GDP. But in 2009 the public deficit was already 11.4% of its GDP. In 2006, the european subvention program to Spain was pulled up. It is therefore no coincidence that the weakest countries in the euro area, are those who have benefited from this fund, since 1986. Moreover, Spain was the largest recipient of EU funds. Indeed, between 1986 and 2006, it received 200 billion euros in the funds. Then, from 1th January 2007, it only received 1.2 billion a year. This reduction of subsidies will cause a contraction in aggregate demand in this country. This will materialize in the real estate crisis, starting in March 2007. Currently there are over one million homes for sale.

When Greece economy was a on the verge of implosion, ECB started to collect In order to cope with the european debt issue, the European Central Bank is currently being recapitalized and since August 8th, the ECB has started to buy Spanish and Italian 10-years bonds on the secondary market. Those purchases of around 22 billion euros, pushed up the value of the warrants. In consequence, the 10-year Italian bond jumped from 90 € to 102 €. Currently, the Spanish 10 years is worth 103.8€ and the 10-year Italian is worth 98.7 €. All shows that the ECB will continue to buy the Italian debt. We should remind here that the ECB holds something like 102 million euros of junk bonds that cannot be sold without causing the total economic collapse of the PIGS. This means that the debt pooling in Europe is already a reality, which can only grow in the future. As a result, if the ECB comes to pay off enough Spanish debt, Spain could be able to continue borrowing for sometime but not for long. Indeed, the Spanish debt ceiling is already very high, 380%of its GDP.

In consequence, when recapitalizing the ECB in order to invest, the ECB will need much more capital to absorb the losses of those European countries. Capital that Europe is currently not in possession. Spain is currently one of the biggest economy in the Euro Zone. Its GDP is 5 times that of Greece…

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