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Published 19 July 2012 05:02, Updated 26 July 2012 04:16
With half of Europe in recession and wealthy nations such as Germany forced to dig deeper to bail out ailing neighbours, the fate of Spain will be a catalyst for disaster or recovery.
Richard Mattione from global funds manager GMO dissects Spain’s problems in a recent white paper – excess sovereign, bank, corporate and household debt, rising sovereign debt due to budget deficits and austerity measures that may turn an economic contraction into a freefall.
Mattione says Spain’s problems are daunting but not insurmountable. From 2000 to 2007, the nation was a European success story with government small deficits or surpluses and government debt falling to a low of 36 per cent of gross domestic product in 2007 compared with Italy and Greece on about 100 per cent.
But the prosperity was driven by a construction boom and astounding rise in property prices. Government coffers filled and in the Spanish system spilled into regional government spending without much supervision from Madrid.
So once the global financial crisis started, Spain’s deficit ballooned. Despite an ambitious plan to get it under control Mattione says Madrid will keep asking for debt finance at a time when markets are not accommodating.
A positive note for Spain is that its trade deficit has shrunk since the crisis began, with imports falling 7 per cent blow pre-GFC levels and exports 12 per cent higher. The change had a lot to do with falling demand but Mattione warns it may be wrong to assume Spain cannot trade its way out of crisis.
Many Australians will sympathise with the painful adjustment going on in Spain as retail sales plummet, industrial production drops and banks deleverage and in the process crimp credit for business growth.
Then there is the real estate problem. From 2000 to 2008, housing prices rose 142 per cent. They are still double what they were in 2000. With a home ownership rate of 82 per cent there is still potential for the 25 per cent unemployment rate to filter through into a jump in mortgage defaults. Similar if less dramatic housing bubbles occurred in Italy, Ireland and Britain. That’s why visiting international property experts predict that Australian housing prices will plummet massively.
But that registers only as a probability if Europe falls off a cliff and plunges the world into deep recession, leading Australia’s jobless rate to ratchet up dramatically and create widespread housing stress.