The Spanish story

As noted in the preceding chapter, Spanish bond yields are substantially below the Portuguese levels but similar to Italian, helped not least by large purchases by the ECB of sovereign bonds, 44 billion euro in the case of Spain in 2013 (as compared to 100 billion euro for Italy). This situation may change, however, as Spain is currently (July 2014) ranked at the second-lowest investment-grade level by both Moody's and Standard & Poor's, Baa2/BBB. Yet the eurozone finance ministers decided on 14 November 2013 that Spain, together with Ireland, may leave the intensive-care unit, and were able to borrow on their own. It should be remembered that the aid that Spain received (see below) was exclusively for recapitalization of the banking system, not for the state itself. Also the amount actually used, 41 billion euro, was much less than was granted, 100 billion.

Spain has two features that one would have thought should dampen the effect of the global financial crisis on the Spanish economy but also two factors which could make it worse. On the positive side, we have the government debt-to-GDP ratio which was below 40 percent when the crisis struck in 2008 and is only slightly above the euroland average even in 2014. The other positive feature was the system of capital “dynamic provisioning,” forcing banks to increase capital cushions during the good years. Unfortunately, it was not enough.

On the bad side, there was firstly the loss of competitiveness vis-à-vis countries like Germany, unit labor costs (ULC) rising by over 30 percent more than Germany's during the decade. This in turn led to a current-account deficit of 10 percent of GDP for several years, despite the booming tourist sector (61 million tourists in 2013, second in Europe only to France). However, the high unemployment rate at 27 percent led to an “internal devaluation” by 2013, forcing down relative ULC by over 15 percent from 2008.

The other problem, as any casual visitor to the Spanish Mediterranean coast could witness, was the construction boom. With house prices rising by 200 percent in the decade up to and including 2007, half a million new properties were built each year in a country of only 16 million households, half of them for foreigners and tourists.