Spain's Financial Crisis

Pages: 11 (3955 words) Published: October 12, 2013

Spanish financial crisis

The 2008–2013 Spanish financial crisis began as part of the world Late-2000s financial crisis and continued as part of the European sovereign debt crisis, which has affected primarily the southern European states and Ireland. In Spain, the crisis was generated by long-term loans (commonly issued for 40 years), the building market crash, which included the bankruptcy of major companies, and a particularly severe increase in unemployment, which rose to 24.4% by March 2012. Spain continued the path of economic growth when the ruling party changed in 2004, keeping robust GDP growth during the first term of prime minister José Luis Rodríguez Zapatero, even though some fundamental problems in the Spanish economy were already evident. Among these, according to the Financial Times, there was Spain's huge trade deficit (which reached a staggering 10% of the country's GDP by the summer of 2008), the "loss of competitiveness against its main trading partners" and, also, as a part of the latter, an inflation rate which had been traditionally higher than those of its European partners, back then especially affected by house price increases of 150% from 1998 and a growing family indebtedness (115%) chiefly related to the Spanish Real Estate boom and rocketing oil prices. During the third quarter of 2008 the national GDP contracted for the first time in 15 years and, in February 2009, it was confirmed that Spain, along with other European economies, had officially entered recession. The economy contracted 3.7% in 2009 and again in 2010 by 0.1%. It grew by 0.7% in 2011. By the 1st quarter of 2012, Spain was officially in recession once again. The Spanish government forecasts a 1.7% drop for 2012. The provision of up to €100bn of rescue loans from eurozone funds was agreed by eurozone finance ministers on 9 June 2012. As of October 2012, the so-called Troika (European Commission, ECB and IMF) is in negotiations with Spain to establish an economic recovery program required for providing additional financial loans from ESM. Reportedly Spain, in addition to applying for a €100bn "bank recapitalization" package in June 2012, now negotiates financial support from a "Precautionary Conditioned Credit Line" (PPCL) package. If Spain applies and receives a PCCL package, irrespectively to what extent it subsequently decides to draw on this established credit line, this would at the same time immediately qualify the country to receive "free" additional financial support from ECB, in the form of some unlimited yield-lowering bond purchases (OMT). The turning point of the Spanish sovereign debt crisis was the July 26th 2012 policy statement by Mario Draghi, president of the ECB, that "the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough." The subsequent program (announced on September 6, 2012) of unlimited purchases of short-term sovereign debt, i.e. OMT, put the ECB's balance sheet behind the pledge. Speculative runs against Spanish sovereign debt were discouraged and 10yr years stayed below the 6% level approaching the 5% level by years end. The residential real estate bubble in Spain saw real estate prices rise 200% from 1996 to 2007. € 651,168,000,000 is the current mortgage debt (second quarter 2005) of Spanish families (this debt continues to grow at 25% per year – 2001 through 2005, with 97% of mortgages at variable rate interest). In 2004, 509,293 new properties were built in Spain and in 2005 the number of new properties built was 528,754. 2004 estimations of demand: 300,000 for Spanish people, 100,000 for foreign investors, 100,000 for foreign people living in Spain and 300,000 for stock; in a country with 16.5 million families, 22–24 million houses and 3–4 million empty houses. From all the houses built over the 2001–2007 period, "no less than 28%" are vacant as of late 2008. House ownership in Spain is above 80%.The desire to own one's own home was encouraged by...
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