This is in order to meet a budget deficit ceiling of 8.7%. In order to qualify for EU funds to bailout Spanish Banks, the Spanish Prime Minister recently announced €65bn of further cuts and tax rises. Therefore, Spain faces a prolonged period of economic depression. Also, monetary policy, set by the ECB has done little to accommodate the deep recession. Spain has pursued a tightening of fiscal policy, but has been unable to devalue the exchange rate. Stephen King Chief economist, HSBC No Measures to Promote Growth The recession is so deep that when you take one step forward on austerity, it takes you two steps back” Debt to GDP ratio has been difficult to reduce because nominal GDP is falling. Also, the budget deficit has shrunk by a smaller amount than expected. Despite several austerity measures, Spanish bond yields remain very high. The scale of the government cut banks and wage freezes have led to social unrest and protests in major Spanish cities.Īlso, austerity measures have not succeeded in reassuring markets. Unfortunately, the austerity measures contributed to a rise in unemployment and further double dip recession.
#Overview in spanish series#
In response to rising bond yields and need of bailing out banks, under pressure from the EU, Spain began a series if austerity measures aimed at reducing the budget deficit and reducing the high bond yields. 
Therefore, markets feared liquidity crisis and this pushed up bond yields.
Like other Eurozone economies, Spain had no ability to devalue or print money. One of the main reasons for the Spanish government debt crisis is the banking crisis which has put pressure on the government to bail out Spanish banks. In 2012, Spanish bond yields have been hovering just below the critical 7% level. Due to rising government debt, markets become worried about the Spanish government’s ability to repay the debt. Spain’s credit rating has been cut from AAA before crisis to BBBīond yields in Spain have since increased to just below 7%. Banking crisis causing Spanish government to have to bailout Spanish Banks. Collapse of property sector leading to evaporation of property taxes. Recession causing fall in tax revenues and higher spending on unemployment benefits. However, this rapidly increased post-2007. The gap between the primary and actual deficit is increasing because bond yields are close to 7%.Īt the start of the credit crisis in 2007, Spanish government debt was very low 34% of GDP. The primary deficit excludes debt interest payments. In April 2012, 5.6 million were unemployed. Since the recession of 2008, unemployment has increased to record levels. Commentators have pointed to an inflexible labour market creating long-term structural unemployment. Unemployment in SpainĮven during the economic boom, unemployment remains stubbornly high in Spain, especially youth unemployment. To restore competitiveness through internal devaluation will require a prolonged period of high unemployment. Being in the Eurozone means they can’t devalue, and therefore there is no quick fix to their uncompetitive exports.Īfter peaking at 10% of GDP, Spain’s current account deficit has fallen to 5% of GDP, but this partly reflects a sharp drop in consumer spending on imports. This has made Spanish exports more expensive. However, over the past few years, Spain has seen a relative decline in competitiveness compared to the Eurozone average. Spanish House Prices Source: Spain the next leg down Collapse in Property Market and banking crisis. Austerity policies (government spending cuts). 
Since 2008, Spain has seen a sharp fall in GDP due to a combination of:
Spanish Nominal GDP Spanish GDP at Market Prices ECB stat The Spanish property market collapsed leading to a deep recession, that persisted for several years. However, in 2008, Spain was badly affected by the global credit crisis. In 2006, Spain started building 800,000 new homes – more than Germany, Italy, France and UK combined. In particular, the rapid economic growth encouraged a boom in property. During the 1990s and early 2000s, Spain enjoyed rapid economic growth and became the 5th largest EU economy.
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