European Countries with a Sovereign Debt Crisis: Spain

Over the past decade, there has been an economic phenomenon that has gripped several powerful countries in the European Union, causing an economic crisis that has caused several countries to spiral into a conflict of identity and policy. While some of these countries have gotten better, others have not. This series is devoted to looking at the actions of each country that faced a sovereign debt crisis, and the actions they took to combat it. Some of these actions have worked tremendously, while others have not. Looking at these actions can give us knowledge about how to handle such issues in the future, while also giving an idea of the strength of the European Union to handle handle such disasters.


Beginning of collapse

For years, before 2008, the housing market had rapidly grown in Spain. However, that market was shown to be an unsustainable bubble when it finally came crashing down in 2008. During that time, the housing market had also risen the GDP to high levels that couldn’t continue without it, and so the entire economy began to contract. Before this period, Spain had largely deregulated the financial sector, allowing banks to hide losses, which mislead investors. This contributed greatly to the unsustainable growth.

Effects of the burst

Before the housing market fell, the GDP was soaring in Spain, albeit largely due to the aforementioned housing market. When the GDP began to drop though, it caused a large increase in unemployment. At the same time, many financial institutions were forced to declare bankruptcy, but the government couldn’t afford to bail them out. The economy fell 3.7% in 2009. This signified the first economic contraction in Spain in 15 years. Also in 2009, unemployment rose to 17.4%, the highest it had been in decades. By 2012, it was as high as 24.4%, twice as high as other European countries at the time.

Debt crisis

By 2012, Spain’s debt was a whopping 72.1% of its GDP. This caused the international investor rating for Spain to initially drop from an A1 to an Aa2. Eventually, though, it fell all the way to BBB-. This made it much harder for Spain to get traction on any of its programs to stimulate job growth, as they just did not have the financial backing. In this time of debt, Spain still lent over 1.5 trillion euros to the private banking sector in an attempt to stimulate the recovery. It didn’t, however, as many depositors had left Spanish banks, and still have to this day.

The Troika

The eurozone financed 100 billion euros to help rescue Spanish loans. The group of financial ministers behind these actions are called the Troika, who were in charge of getting the entirety of the eurozone back on track, financially. In order to receive this assistance, Spain was required to cut 65 million euros out of their budget in a required austerity program. Although Spain is still recovering today, they are no longer in a decline from the sovereign debt crisis.