Is Spain next?

Flies never visit an egg that has no crack, says a Chinese proverb. But for speculators, the fourth largest economy in the eurozone offers plenty of cracks. Above all, there is the large budget deficit, which last year reached 8.5 percent of GDP. This year, the government in Madrid must cut the deficit to 5.3 percent or face the wrath of Brussels. Cost-cutting thus has the highest priority - and this at a time when the Spanish economy has begun shrinking again.

A vicious cycle of cutbacks and recession

Christian Schulz of Berenberg Bank says the biggest danger is that this could trigger a spiral of cuts, deeper recession, further inability to meet budget targets, and even more severe cuts: "In addition, Spain is in many ways still suffering the effects of the property bubble. Unemployment has exploded, largely because of the collapse of the construction sector."

At 23 percent, Spain has the highest rate of unemployment in the EU. Spanish banks are sitting on a pile of loans they made during the boom and which now cannot be repaid. The volume of bad loans is currently estimated at 150 billion euros and will continue to grow. That's because there has been no price adjustment in the real estate sector, says Jürgen Donges, emeritus professor of economics at the University of Cologne: "The prices have gone down a little, but if you consider that around a million apartments are still standing empty, I would say as an economist that the prices will have to take a nosedive."

Banking sector remains critical

Another drop in real estate prices will further weaken the banks, which are already dependent on the European Central Bank. In March, they borrowed more than 300 billion euros from the ECB - more than ever before. "Many savings banks in Spain are, technically speaking, bankrupt," Donges told DW.

The financial markets are worried that Spanish government bonds will find no buyers if the banking sector collapses. But Donges does not expect this. First, he said, it was not the major banks that had this problem, but the savings banks; and second, there was already a kind of national rescue plan to bring about recapitalization: "The question is whether this is sufficient or whether the government should still offer more."

A flexible line of credit

If the government in Madrid is unable to do that, the country could be given a flexible credit line, Schulz says. This means "if Spain does not find enough buyers at auctions, the European Financial Stability Facility, or later, the European Stability Mechanism rescue funds could step in and guarantee the Spaniards that they can get rid of sufficient bonds at a certain interest premium."

Given the turmoil in financial markets, Schulz says this is quite a realistic scenario. Neither Schulz nor Donges expects that the Spanish economy as a whole will need to seek the help of the euro bailout fund.

Not a bad starting position

"Spain has already gone through a big adjustment process," Schulz said. Exports have boomed in recent years. Imports have gone down. The current account deficit has thus almost been eliminated, he says. "Spain has already made fiscal progress and progress in the restructuring of banks. And Spain's starting position was not bad," Schulz told DW.

By this he means that even though it rose rapidly during the crisis, Spain's national debt is still only about 70 percent of GDP, below the eurozone average of 88 percent. In addition, Spain has already met half of its refinancing needs for this year.

For Donges, one thing is clear: "Spain needs no help from the outside; the Spaniards can solve their problems. They only have to want to."

Do Spaniards want to change?

Donges believes the fact that they gave their new government an absolute majority is a sign that the Spaniards want to change. This is also a positive difference between Spain and Italy. Mariano Rajoy has already taken advantage of his comfortable situation to implement his reform plans. "I know of no other case in which a newly elected government has really implemented fundamental reforms in a hundred days," Donges said.

Jürgen Donges researches and teaches in Madrid, and he knows Spain's national pride like few others: "It simply bothers the Spaniards when you tell them they are destroying the euro."

They would rather be a part of the solution and remain a reliable partner for Europe, he says.

Author: Zhang Danhong / sgb
Editor: Michael Lawton