Is Spain prepared for another financial crisis?

Ten years after the demise of American banking giant Lehman Brothers construction cranes no longer crowd the Spanish skyline, inequality and precarious working conditions have increased, and what’s worse, many Spaniards have lost hope of improving their lot in life, the way they once used to.

Just as in John Steinbeck’s novella, The Pearl, the property boom was a gift that turned into a nightmare. But how did it happen? Why didn’t the property bubble ring alarm bells?

At the height of the property bubble, Spain was consuming much more than it was producing. So in order to finance this lavish lifestyle, it was forced to borrow 100€ billion from abroad in 2007 alone. This unprecedented amount of debt was backed up by the country’s property assets. Believing that real estate prices could only go up, Spaniards became overly indebted to the rest of the world.

Due to this phenomenon of vast sums of money being introduced into the economy, Spain lost its competitiveness and kept buying more foreign goods and services.

This was always countered in the past by devaluing the peseta, but with the euro, this scenario was no longer an option. “Prices in Spain rose by 4 per cent and wages by 3.5 per cent, while in Germany it was 1 per cent and 0.5 per cent respectively. The gains made in purchasing power were the same, but the Germans were ahead in terms of competitiveness,” says Álvaro Nadal, the former Minister of Energy under prime minister Mariano Rajoy.

For Spanish homeowners, a property bubble was all but inevitable despite the collapse of Lehman Brothers with the real estate market being packed with more and more gunpowder as each year went by.

Despite all this, there were very few warnings from either national or international economy watchdogs. It was argued that the arrival of money into Spain was normal as its economy caught up to the world’s richest nations. It was even suggested that imbalances among member states of the European monetary union did not matter, in the same way, that they did not matter between Mississippi and California. It was only in 2003 that the Bank of Spain warned that prices in the housing market were inflated. Yet despite this, the bank’s governor, Jaime Caruana, did nothing about it, as lenders continued to hand out bigger and bigger loans.

You could say that the bubble was the goose that laid the golden egg and that nobody wanted to kill it. And so there is still some debate over whether or not the euphoria could have been stopped at all. After having adjusted for inflation, property rates were negative, so getting into debt was risk-free because the interest rates were paid for by inflation. What might have made people make sense from an individual point of view turned into a kind of collective madness! “It happened to all the eurozone’s periphery countries; inflation was higher there and that meant that investment was concentrated in the south in the quest for higher returns,” says José Manuel Campa, former secretary of state for the economy during  Zapatero’s administration.

“The external deficit should have set off alarm bells for the banks and the northern [European] regulators who were lending the money. With the peseta, they would have devalued the currency with a deficit of 3% of GDP, yet the deficit reached 10%,” says Nadal. According to the figures, foreign banks lent Spain more than 750€ billion. And when Lehman Brothers went bust, the credit dried up overnight, as did work in the construction industry and related sectors, which led to the loss of 2.1 million jobs. Overall, the economy lost 3.8 million jobs between the third quarter of 2008 and the beginning of 2014.

The Spanish government thought it could address the situation by loosening the public purse string to create employment for the laid-off construction workers thinking that the financial problem was just temporary and that the building sector would recover.

This diagnosis proved wrong. “The surplus was not structural. The elasticity of the income coming from construction was far greater than in any other sector. When you buy a home, you pay more taxes than ever,” says Campa. “[When the bubble burst] the government lost around €70 billion in tax revenues, and they still haven’t passed a reform to address this imbalance in the tax system.”

According to Nadal, “If I hand out 500€ bills, Spaniards will spend it on American cell phones, Korean TVs and German cars. And it is foreign economies that are stimulated. That’s why the problem always lies with competitiveness. We got into debt to finance an expansion that was partly going abroad.”

The lack of financial control by regional governments was also a contributing factor, as was the lack of bank recapitalization to match that of other Eurozone countries. Having avoided the acquisition of toxic financial assets, and having the safety net of additional capital, it was believed that Spanish lenders would be in a better position to weather the storm.

The crisis in Spain was further exasperated in 2010 when German Chancellor Angela Merkel and French President Nicolas Sarkozy put the poorer Eurozone countries at the mercy of the markets by announcing debt restructuring conditions for over-indebted countries. At this point, Spain was considering a return to the peseta as investors fled the country.

On June 9, 2012, the Spanish government requested a rescue package for its struggling banks that saw Brussels hand over 41.3€ billion.

Now in 2018, the Spanish GDP has recovered, but the economy remains quite vulnerable. The duality of the labour market has not been corrected and the dropout rate amongst students means that part of an entire generation is not prepared for the current climate.

Despite inequality levels, improving slightly, the crisis has generated a lack of competitiveness by shifting private debt into the public sphere leaving little in the State coffers to spare.

The conclusion ten years on to the “Crisis” is that Spain did too little too late and that the country is not prepared for a future crisis or a new slowdown of the Spanish economy.

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