>IN FOCUS: Can We Cure the Spanish Flu?

However it’s resolved, Greece’s debt story could soon be largely behind us, but the same can’t be said for the Eurozone crunch. Portugal and Ireland will need assistance from the Eurozone’s bailout fund (ESM/EFSF) beyond 2012, given the bond market’s reluctance to extend them credit. But Spain’s debt and banking troubles are more critical, with the remaining fi repower in the EFSF/ESM too small to cover its financing needs, and its debt—larger than Greece, Portugal and Ireland combined—too weighty for lenders to forgive without a punishing blow to Eurozone financial health. Can we cure the Spanish fi nancial fl u, and if so, will domestic and European policy makers find the antidote in time?


A Housing-Centred Bust
Economically, Spain’s story, centred on excesses in consumption and housing, is closer to that of Ireland or the US than to Greece. While the government can’t be accused of overspending in the years leading up to the recession (Chart 1, left), the private sector was moving down a perilous path. In addition to a housing bubble, households were chronically over-consuming, with industry under-exporting relative to its Eurozone peers (Chart 1, right).


That saw persistent current account deficits financed by borrowing from overseas. Today, Spain’s external net liabilities stand at a whopping 93% of GDP (Chart 2, left) with portfolio-related obligations at roughly 60%—leaving the nation susceptible to financial instability should foreign creditors lose confi dence and pull the plug on funding. Debts accumulated by banks account for the lion’s share—symptomatic of a private sector that was living beyond its means for years (Chart 2, right).


To read report in detail: SPANISH FLU