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Spain Takes the spotlight From Greece in Europe’s Debt Crisis
Unlike Greece, Spain has a low debt-to-GDP ratio. The country’s problem is its banks’ large real estate debt, fears about Spain’s economy, and the fact that its sovereign debt is largely financed abroad. If foreign investors walk away from Spanish bonds, it could cause a sovereign debt crisis for Madrid that could spread to the rest of Europe.
World stock markets shuddered on Monday and Tuesday after the Bank of Spain, the country’s central bank, seized a small savings bank called Cajasur and replaced its directors after it failed to merge with a larger savings bank, Unicaja. This was followed on Monday by the announcement that four small savings banks were being merged into the country’s fifth-largest bank, with assets of 125 billion euros ($152 billion), causing fears of market instability to spread across the continent.
“Spain could easily be like Japan,” says Jonathan Tepper, a partner at Variant Perception, an independent macro economics research firm based in London, referring to Tokyo’s 15 years of price deflation and stagnating economy. “In terms of a long, protracted period in which property prices go down on a sustained basis and banks have to recapitalize themselves, I think the problems are far ahead.”
Unlike Greece, Spain’s debt-to-GDP ratio is among the lowest in Europe, about 55% of GDP. Japan’s debt is approaching 200% of GDP, but thanks to a high savings rate, it finances 95% of the debt internally. Spain’s problem, along with the rest of Europe’s periphery, is that it must finance its debts abroad. Some 45% of Spanish debt is held by foreigners — the amount climbed to 55% in the last year.
“If people don’t show up for your bond auctions, it can be a big problem,” says Tepper. “There was a problem with one of the Spanish bond auctions last Wednesday where they didn’t raise the full amount they wanted and had to do it at a higher price. People are focusing on the wrong thing — it’s not so much the absolute level of debt, it’s more how the debt is funded.”