Spain’s Private Sector Proves To Be Its Achilles Heel
MADRID: Nervousness and speculation in European financial markets is rife since the Irish bail out and countries lying on the Euro zone periphery such as Ireland, Greece, Portugal and Spain are particularly susceptible to movement in the markets. Spain’s financial position is also looking jittery despite two years of austerity measures and funding implemented by the Socialist government led by Jose Luis Rodriguez Zapatero.
Major funding of the Spanish economy by its government when the World recession hit in 2008 had caused Spain’s deficit to increase from a surplus to a 11.1 pc deficit to Gross Domestic Product (GDP). However, Spain’s fiscal deficit is still lower than most European countries including the UK and so sovereign debt is not the real issue. The record rise in interest rates on 10 yr Spanish Bonds up 260 basis points due to perceived risk of investment in Spain is more to do with foreign exposure and private debt which ballooned during the massive economic expansion and home building construction in 2008.
Payment and investment for expansion in the Spanish economy came mostly from overseas along with a steep rise in imports causing a huge deficit and exposure to foreign investment. This exposure has made Spain vunerable to market conditions such as major bail outs for Greece and Ireland. As reported in the Financial Times today Giles Moec of Deutsche Bank stated that: “genuine source of Spain’s vulnerability” is the private sector, which accumulated before the start of the recession a debt of 210 per cent of GDP, compared with an average of 130 per cent of GDP in Germany, France and Italy.”