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Financial Planning > College Planning > Student Loan Debt

Spain’s Public Debt Soars to New Highs, Smothering Optimism

By Savita Iyer-Ahrestani

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A small ripple of optimism over the gradually improving state of the Spanish economy that filtered through the markets a few weeks ago is now once again shaky on the latest figures from the beleaguered country, which show its public debt burden has soared well beyond governmental forecasts.

The Bank of Spain recently announced that the nation’s public debt had reached 92% of GDP for the end of June, a noticeable increase over the 90% tallied up in March, and numerous parties, the International Monetary Fund (IMF) included, believe that Spain’s public debt-to-GDP is likely to rise even further, most likely topping out well above the 100% mark.

That’s bad news for a country where economic recovery is still but a whisper and where a host of problems, not least severe unemployment, continue to make everyday life extremely tough for scores of people. But nevertheless, Spain’s public debt load is still lower than that of other Southern European countries that continue to suffer the pains of the Eurozone crisis, said Brian May, European economist at Capital Economics in London.

“One hundred percent is not a nice number, but given that Italy’s public debt has been over 100% for a number of years now, and Greece, too, is well above that level, Spain’s numbers aren’t too worrying by comparison,” May said.

Being able to manage that debt burden, though, even if it climbs to a higher level will depend on Spain’s resolve and ability to address the deep-rooted structural issues that continue to hold back economic growth.  

In all fairness, the country has been tackling some of those deeper economic issues and because of that, there are definitely signs that the Spanish recession is easing, May said.  

The European Central Bank’s (ECB) Outright Monetary Transactions (OMT) program has also brought Spanish government bond yields to more manageable levels and the worst of the fiscal squeeze appears to have passed, May said. The labor market downturn has also eased and Spanish exports, he said, are expanding as the country’s business base improves, thereby lending support to both the economy and the banking sector.  And finally, encouraging labor market data suggests also that there have been improvements in that area.

Spanish banks have also succeeded in reducing their ECB borrowings. In August, borrowings totaled around E250 billion, a net decrease from the E400 billion borrowed a year ago.

But even though Spain may be in a better position than its other European periphery counterparts, and economists are more optimistic about Spain than they are about the rest, the country still faces some very serious challenges as the worst of the crisis continues to bore its way through the economy, May said.

The high levels of household debt in Spain are a real concern and combined with household savings rates that are now at extremely low levels as a result of the recession will mean that household spending, which is already low, will fall even further.

Credit is also still very tight in Spain, which means that businesses are going to have to deleverage further and that will make them reluctant to invest, according to May. “Although Spanish banks may have better access now to wholesale markets for their funding needs, and are borrowing there rather than using ECB money, it could be that the gradual improvements we have seen in the indebtedness of the banks are actually due to the banks not using the emergency money that they could have used. So rather than extending credit, they may simply be giving unused money back to the ECB,” he said.

Overall, Spain’s debt dynamics are in a healthier position than Greece’s, and whereas Greece will need help for years and years to come, Spain could potentially work its way out of the mess if interest rates don’t rise and the Spanish economy continues to stage a decent, albeit slow, recovery going forward.

But even though Spain may be able to solve its problems without financial assistance from outside, such a high level of public debt is not a good thing, and May still has a more pessimistic view on the Spanish situation, believing that there’s a real risk of deflation, which will make it harder for both the public and private sectors to reduce their onerous debt burdens.

Although a continued rise in public debt isn’t going to set off another Eurozone panic, or prompt the Spanish government to default on its debt, Spain, the country may well end up having to seek financial assistance from the Eurozone to, May said, “to ensure that its public debt return to a stable footing.”

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