With increasing debt, out of control unemployment and a general strike Spain has some serious economic problems. However, before the financial crisis of 2008 Spain was seen as a prudent member of the Eurozone with GDP debt being half that of Germany at 36%, and a well regulated financial sector. But since the aftermath of the financial crisis it has been all downhill for the Spanish economy with unemployment now at 24% and public debt at 66%.
Causes of the downturn
Like most economies before the financial crisis Spain had access to cheap credit. This was especially prevalent since entering the Eurozone interest rates, which were set by the European Central Bank ECB) in Frankfurt fell from 12.75% in 1995 to 3% in 2005.
Spain’s banks and households realising that they had massive debts whose collateral was overpriced housing. Property values have fallen 27% and the building of new home is down 80% and given the size of the construction sector mentioned above this has some major implications for the Spanish fundamentals.
The Spanish economy is in serious trouble. With unemployment at 24% and the subsequent fall in consumer spending can it get much worse? Well, rating agency Standard & Poors have proceeded to downgrade Spain to BBB+ rating, which means “adequate payment capacity” and is only a few notches above a junk rating.
The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.