Today, we read this interesting article, Nothing can save Spain,
"Greece is not Spain", has been how European politicians have been trying to reassure the markets. Once analysts had a closer look at the Spanish figures they concluded that this was indeed true ? Spain?s troubles are much worse.
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In fact, before the crisis struck the Spanish were seen as Europe?s model citizens. Public debt was low, the economy grew rapidly, and in 2007 the government could still report a healthy budget surplus of 1.9 per cent of GDP. There was no sign of grave economic mismanagement, let alone on a scale comparable to the Greek basket case.
So what turned the Spanish miracle into an economy on the abyss? How can a country be regarded as a role model one day and almost a failed state the next?
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But whereas in Greece the lower interest rates were taken as an opportunity to incur greater public deficits, in Spain it was the private sector which accepted the invitation to go deeper into debt.
One sector in particular benefited from this injection of cheap cash thanks to the euro: real estate. For many years, Spanish house prices only knew one way, and that was up. Between 1998 and 2007, property prices increased by about 10 per cent per year on average.
When the global financial crisis struck, the bubble burst. Since 2008, Spanish house prices have declined 15 per cent and there is no end in sight to the correction. Some real estate experts are predicting further falls of up to 35 per cent.
Suddenly, the weak foundations of Spain?s economy are exposed, especially its over-reliance on debt coupled with low productivity.
Consequently, the pristine clean Spanish public debt turned into deficit as unemployment rate soared to 20% and bad debts plagued the banking system.
Note that we highlighted the word ?suddenly? in the final paragraph.
The key to remember is that the economy looked rosy until something suddenly gave way. The high tide of debt kept the weak foundations hidden under the water. Finally, when the debt tide receded, the weak foundations were exposed. With the weak foundations in full view, the financial market reacted in horror accordingly.
Spain?s situation reminds us very much of Australia. As the Reserve Bank of Australia (RBA) governor hinted in a speech last week,
Markets can happily tolerate something for an extended period without much reaction, then suddenly react very strongly as some trigger brings the issue into clearer focus.
Again, we highlighted the word "suddenly.? As we wrote in Serious vulnerability in the Australian banking system, there is a serious weak underbelly in the Australian economy. All we need is a trigger for all eyes to be on its weak foundation (see Will there be an AUD currency crisis?).
However, many pundits in the mainstream media are still putting on Turkey Thinking (see our book, How To Foolproof Yourself Against Salesmen & Media Bias for more information on Turkey Thinking).
Tags: debt, Glenn Stevens, RBA, Spain
