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Q&A: Spain's woes Eurozone crisis explained
(7 days later)
Spain, Europe's fifth-largest economy, has had doubts cast on the strength of its banking sector thanks largely to the country's property crash.Spain, Europe's fifth-largest economy, has had doubts cast on the strength of its banking sector thanks largely to the country's property crash.
Its banks have lent billions of euros they might never get back and this has made investors very nervous.Its banks have lent billions of euros they might never get back and this has made investors very nervous.
On 18 May, credit ratings agency Moody's cut its ratings for 16 Spanish banks, reflecting the heightened risk of them suffering huge losses if property loans are not repaid.On 18 May, credit ratings agency Moody's cut its ratings for 16 Spanish banks, reflecting the heightened risk of them suffering huge losses if property loans are not repaid.
The Spanish government has had to part-nationalise one of its banks and may have to bail out more.The Spanish government has had to part-nationalise one of its banks and may have to bail out more.
As a result Spain is having to pay out more on its bonds, or debt, to entice investors to buy them. Increased borrowing costs are only adding to the country's existing economic problems.As a result Spain is having to pay out more on its bonds, or debt, to entice investors to buy them. Increased borrowing costs are only adding to the country's existing economic problems.
What went wrong with Spain?What went wrong with Spain?
Spain's story illustrates the fact that the eurozone's problems run far deeper than the issue of excessive borrowing by ill-disciplined governments.Spain's story illustrates the fact that the eurozone's problems run far deeper than the issue of excessive borrowing by ill-disciplined governments.
Greece, Portugal and Italy all had way too much debt.Greece, Portugal and Italy all had way too much debt.
But the Spanish government's borrowing was zero - that is, it ran a balanced budget on average - every year until the eve of the 2008 financial crisis.But the Spanish government's borrowing was zero - that is, it ran a balanced budget on average - every year until the eve of the 2008 financial crisis.
And as Spain's economy grew rapidly pre-2008, its debt ratio was falling. Germany's, by contrast, continued to rise.And as Spain's economy grew rapidly pre-2008, its debt ratio was falling. Germany's, by contrast, continued to rise.
When Spain joined the euro, interest rates fell to the much lower levels typical in Germany and while the Spanish government resisted the lure of cheap loans, most ordinary Spaniards did not.When Spain joined the euro, interest rates fell to the much lower levels typical in Germany and while the Spanish government resisted the lure of cheap loans, most ordinary Spaniards did not.
The country experienced a long boom, underpinned by a housing bubble, as Spanish households took on bigger and bigger mortgages.The country experienced a long boom, underpinned by a housing bubble, as Spanish households took on bigger and bigger mortgages.
House prices rose 44% from 2004 to 2008, at the tail end of a housing boom, according to ministry of housing data. Since the bubble burst, they have fallen by 25%.House prices rose 44% from 2004 to 2008, at the tail end of a housing boom, according to ministry of housing data. Since the bubble burst, they have fallen by 25%.
The economy, which grew 3.7% per year on average from 1999 to 2007, has shrunk at an annual rate of 1% since then.The economy, which grew 3.7% per year on average from 1999 to 2007, has shrunk at an annual rate of 1% since then.
When the housing bubble burst, so did its construction sector.When the housing bubble burst, so did its construction sector.
So, although the Spanish government still has relatively little existing debts, it is now having to borrow like crazy to fill the gap left by the jump in unemployment benefits and collapse in tax revenues during the downturn.So, although the Spanish government still has relatively little existing debts, it is now having to borrow like crazy to fill the gap left by the jump in unemployment benefits and collapse in tax revenues during the downturn.
What has that done to its cost of borrowing?What has that done to its cost of borrowing?
Last year, Spain was staring into the same financial abyss that had already swallowed Greece, Portugal and the Republic of Ireland, and was sucking in Italy.Last year, Spain was staring into the same financial abyss that had already swallowed Greece, Portugal and the Republic of Ireland, and was sucking in Italy.
The Spanish government's cost of borrowing money on the financial markets for 10 years - a popular barometer of lender fear - peaked at a rate of 6.78% in November 2011.The Spanish government's cost of borrowing money on the financial markets for 10 years - a popular barometer of lender fear - peaked at a rate of 6.78% in November 2011.
That is close to the 7% level where other eurozone governments turned to their neighbours for a bailout.That is close to the 7% level where other eurozone governments turned to their neighbours for a bailout.
After the European Central Bank intervened, yields dropped to 4.8%.After the European Central Bank intervened, yields dropped to 4.8%.
In recent weeks, they have risen again on fears over the state of the economy - to about 5.8% now.In recent weeks, they have risen again on fears over the state of the economy - to about 5.8% now.
What is the state of the economy?What is the state of the economy?
The Bank of Spain recently confirmed that the country's economy has returned to recession.The Bank of Spain recently confirmed that the country's economy has returned to recession.
It contracted in the first quarter of 2012, the central bank said, after shrinking 0.3% in the three months to December. It is expected to shrink by 1.7% overall in 2012.It contracted in the first quarter of 2012, the central bank said, after shrinking 0.3% in the three months to December. It is expected to shrink by 1.7% overall in 2012.
It also shrank after the crisis in 2008, as did most Western economies.It also shrank after the crisis in 2008, as did most Western economies.
Spain also currently has the highest unemployment rate in Europe - at 24%. More than half of young people are out of work.Spain also currently has the highest unemployment rate in Europe - at 24%. More than half of young people are out of work.
And the country has said it will miss its deficit target - set by the European Commission - of 4.4% of total economic output in 2012.And the country has said it will miss its deficit target - set by the European Commission - of 4.4% of total economic output in 2012.
The Commission has now set a new target of 5.3% for this year. (Spain's deficit ran at 8.5% of economic output in 2011.)The Commission has now set a new target of 5.3% for this year. (Spain's deficit ran at 8.5% of economic output in 2011.)
The EU's Economics Commissioner, Olli Rehn, has said the situation in Spain is "fragile" and the country "needs to stick to its targets in order to avoid any setbacks in terms of its borrowing costs".The EU's Economics Commissioner, Olli Rehn, has said the situation in Spain is "fragile" and the country "needs to stick to its targets in order to avoid any setbacks in terms of its borrowing costs".
What is the political situation?What is the political situation?
In November, Spain's centre-right Popular Party won a resounding victory in a parliamentary election dominated by the country's debt crisis.In November, Spain's centre-right Popular Party won a resounding victory in a parliamentary election dominated by the country's debt crisis.
The new Prime Minister, Mariano Rajoy, committed himself to cutting the deficit.The new Prime Minister, Mariano Rajoy, committed himself to cutting the deficit.
In January, he outlined 8.9bn euros ($11.8bn; £7.4bn) in new budget cuts, as well as tax increases designed to raise 6.3bn euros.In January, he outlined 8.9bn euros ($11.8bn; £7.4bn) in new budget cuts, as well as tax increases designed to raise 6.3bn euros.
Legislation approved in February makes it easier and cheaper for companies to fire employees.Legislation approved in February makes it easier and cheaper for companies to fire employees.
It also reduces maximum severance pay to 33 days' salary for each year worked, compared with the current 45 days.It also reduces maximum severance pay to 33 days' salary for each year worked, compared with the current 45 days.
The government insists the reforms will create a more flexible system for businesses and workers, in a country with a stagnant economy that needs to start creating jobs.The government insists the reforms will create a more flexible system for businesses and workers, in a country with a stagnant economy that needs to start creating jobs.
But many are unhappy with the deep austerity cuts and Spain's first nationwide general strike in more than a year took place in late March.But many are unhappy with the deep austerity cuts and Spain's first nationwide general strike in more than a year took place in late March.
But the prime minister has vowed not to back down, pushing ahead with measures including freezing public sector workers' salaries, reducing departmental budgets by 16.9% and raising electricity prices by 7%.But the prime minister has vowed not to back down, pushing ahead with measures including freezing public sector workers' salaries, reducing departmental budgets by 16.9% and raising electricity prices by 7%.
"The biggest mistake would be to do nothing," Mr Rajoy has said."The biggest mistake would be to do nothing," Mr Rajoy has said.