Italy and its debt disaster are pretty spectacular, so attention has been drawn away from the disaster that is Spain. Give it a few more days. The bond markets are going to take another look at the figures coming out of Madrid and widen their eurozone field of fire. (Yesterday Spanish spreads on ten year bonds were already at 4.2 percent.)
So far, the only reason Spain has not had to follow Greece, Portugal and Ireland into handing over control of its finance ministry to Brussels-appointed eurocrats is because its level of public sector net debt, relative to GDP, is still below that of Germany and the euro area average. (Meanwhile by the end of this year, Italy will have the second highest level of public sector net debt, relative to GDP, in the eurozone.)
However, according to a report out yesterday from the economist Jamie Dannhauser at Lombard Street Research, Spain, relative to Italy, faces a much bigger task in reducing its fiscal deficit and placing the debt stock on a declining path:
‘Whereas the Italian budget should be in balance this year before interest payments are taking in account, the Spanish look like running a so-called “primary” deficit equal to around six percent of GDP. Official projections that it could get down to four and a half percent of GDP look wildly optimistic with Spain almost certainly back in recession.’
But here’s what really sets Spain apart from Italy, and shows how dangerous Spanish investments now are: the vast scale of borrowing that took place within the private sector before the crisis and the consequent asset price boom.
And that’s not just the Spanish property market bubble.
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