Spain has been under increasing pressure about its own sovereign debt position as dark clouds continue to swirl around its Mediterranean neighbour Greece.Their debt is huge, the banking system is troubled, and they had a monster housing bubble.
Strictly speaking, the country may not be as bad as Greece, but when you consider how enormous Spain is, its troubles could make Greece look like child’s play.
Just consider this: Spain’s GDP is $1.6 trillion. Greece’s is $357 billion.
This property boom saw the price of Spanish real estate rise 80% from 1990 to 2009.
This was due to similar reasons as those for the US and UK booms: relatively low interest rates and an easy credit environment.
Source: The Economist
The property boom led to a period of relatively low unemployment in Spain and an influx of foreign workers and dependents from abroad.
Since the boom collapsed, this influx has only served to further exacerbate the unemployment problem.
Source: Index Mundi
Spain's unemployment was a staggering 18.8% in the fourth quarter of 2009. This is a rise on the previous quarter's 17.9% and was above the consensus projections by 0.3%.
This is a return to the pre-boom time numbers, though higher than the year 2000 average of 16%.
Source: Instituto Nacional Estadistica
Unemployment looks continue to trend upwards due to an increasing labour force and new austerity measures which will cut down on government spending.
Source: Index Mundi
Because of Spain's position in the Euro zone, it has been confronted with wage demands which are unfit for its less modern economy.
Spain cannot compete with Germany for the quality of its manufactured goods, as it cannot devalue its currency, lower wages, and become more competitive in the market place.
Spain, unlike Greece, used its period of growth to pay off debts and only had debt of 55% of GDP, which is the Euro zone average, prior to the crisis.
This should, theoretically, make servicing its debt easier as it has less.
Source: Index Mundi
Spain has been on a slash and burn assault of entitlement programs since the severity of its recession became obvious.
The collapse of the property bubble has put Spain in a position of retrenchment in terms of where it sees its economy going.
It now needs to develop new growth sectors to grow its GDP. Likely candidates include energy, where Spain has invested heavily in solar technologies.
Source: Banco de Espana
Compared to Greece, foreign bank exposure to Spanish government debt is limited. This does not mean that it isn't systemically large in certain countries banking sectors, however.
A primary example of this would be Cathay Life Insurance of Taiwan, which has significant exposure to Spanish debt. More interesting is which banks and or insurance companies have issued derivative instruments on Spanish debt, such as CDS.
These investors could be put under heavy pressure come July, when Spain has huge obligations to meet.
Source: Bank of International Settlements
Spain is still in a position much better than the other PIIGS states. It does not have their debt load, nor the CDS spread of its rivals.
However, contagion via a European default or a prolonging of the Greek debt crisis could bring further pressure on the Spanish economy, which will result in higher CDS spreads and increasing yields on debt.
This week will see another Spanish debt issuance, this time of the 15-year variety, which will provide raw data on how markets perceive the country against its neighbours. Future months might hold more problems for Spain, however.
Barclays Capital finds that Spain is not one of the PIIGS most in need of debt refinancing over the next several months, but will be faced with huge obligations in July, according to the FT Alphaville.
Spain may be safe from the uncertainty over Greece right now, but come July things could get extremely difficult.
Approximately 25 billion Euros ($34.31 billion) in refinancing are needed in July, and Spain will have to tap the debt markets to get that. Spain can only hope the crisis over Greece is over by then, lest it might be dealing with its own.