2008–2009 Spanish financial crisis
Encyclopedia
The 2008–2011 Spanish financial crisis is part of the world Late-2000s financial crisis
. In Spain, the crisis was generated by long term loans (commonly issued for 40 years), the building market crash which included the bankruptcy of major companies, and a particularly severe increase in unemployment, which rose to 21.4% in October 2011.
Spain continued the path of economic growth when the ruling party changed in 2004, keeping robust GDP growth during the first term of prime minister José Luis Rodríguez Zapatero
, even though some fundamental problems in the Spanish economy were already evident. Among these, according to the Financial Times
, there was Spain's huge trade deficit
(which reached a staggering 10% of the country's GDP by the summer of 2008), the "loss of competitiveness
against its main trading partners" and, also, as a part of the latter, an inflation
rate which had been traditionally higher than those of its European partners, back then especially affected by house price increases of 150% from 1998 and a growing family indebtedness (115%) chiefly related to the Spanish Real Estate boom
and rocketing oil prices.
The Spanish government official GDP growth forecast for 2008 in April was 2.3%. This figure was successively revised down by the Spanish Ministry of Economy to 1.6. This figure looked better than those of most other developed countries. In reality, this rate effectively represented stagnant GDP per person due to Spain's high population growth, itself the result of a then continuing strong level of immigration. Currently most independent forecasters estimate that the rate was actually around 0.8% instead, far below the strong 3% plus GDP annual growth rates during the 1997-2007 decade. Then, during the third quarter of 2008 the national GDP contracted for the first time in 15 years and, in February 2009, it was confirmed that Spain, along other European economies, had officially entered recession
.
In July 2009, the IMF worsened the estimates for Spain's 2009 contraction, to minus 4% of GDP for the year (close to the European average of minus 4.6%), besides, it estimated a further 0.8% contraction of the Spanish economy for 2010, the worst prospect amid advanced economies.
rise 201% from 1985 to 2007.
€ 651,168,000,000 is the current mortgage debt (second quarter 2005) of Spanish
families (this debt continues to grow at 25% per year - 2001 through 2005, with 97% of mortgages at variable rate interest). In 2004 509,293 new properties were built in Spain and in 2005 the number of new properties built were 528,754. 2004 estimations of demand: 300,000 for Spanish people, 100,000 for foreign investors, 100,000 for foreign people living in Spain and 300,000 for stock; in a country with 16.5 million families, 22-24 million houses and 3-4 million empty houses. From all the houses built over the 2001-2007 period, "no less than 28%" are vacant as of late 2008
House ownership in Spain is above 80%. The desire to own one's own home was encouraged by governments in the 60s and 70s, and has thus become part of the Spanish psyche. In addition, tax regulation encourages ownership: 15% of mortgage payments are deductible from personal income taxes. Even more, the oldest apartments are controlled by non-inflation-adjusted rent-controls http://www.jubilo.es/asp/pagina.asp?IDPagina=3360 and eviction is slow, therefore discouraging renting.
As feared, when the speculative bubble
popped Spain became one of the worst affected countries. According to eurostat
, over the June 2007-June 2008 period, Spain has been the European country with the sharpest plunge in construction rates. Actual sales over the July 2007-June 2008 period were down an average 25.3% (with the lion's share of the loss arguably happening in the 2008 tract of this period). So far, some regions have been more affected than others (Catalonia
was ahead in this regard with a 42.2% sales plunge while sparsely populated regions like Extremadura
were down a mere 1.7% over the same period).
Banks offered 40-year and, more recently, 50-year mortgage
s. Unlike Ireland, Spanish labour costs did not track house market rises. While some observers suggest that a soft landing will occur, others suggest that a crash in prices is probable. Lower home prices will allow low-income families and young people to enter the market; however, there is a strong perception that house prices never go down. As of August 2008, while new constructions have come virtually to a halt, prices have not had significant movements, neither up nor downwards. The national average price as of late 2008 is 2,095 euros/m2
s, which in a scenario of record prices added much pressure to the inflation rate. Thus, in June 2008 the inflation rate reached a 13-year high of 5.00%. Then, with the dramatic decrease of oil prices that happened in the second half of 2008 plus the confirmed burst of the property bubble, concerns quickly shifted to the risk of deflation instead, as Spain registered in January 2009 its lowest inflation rate in 40 years which was then followed in March 2009 by a negative inflation rate for the first time ever since this statistic was recorded.
Spain's largest bank, Banco Santander, took part in the UK government's bail-out of part of the UK banking sector.
, Spain suffered a severe setback in October 2008 when it saw its unemployment rate surging to 1996 levels. During the period October 2007-October 2008 Spain had its unemployment rate climbing 37%, exceeding by far the unemployment surge of past economic crises like 1993. In particular, during this particular month of October 2008, Spain suffered its worst unemployment rise ever recorded and, so far, the country is suffering Europe's biggest unemployment crisis. By July 2009, it had shed 1.2 million jobs in one year and was to have the same number of jobless as France
and Italy
combined. Spain's unemployment rate hit 17.4% at the end of March, with the jobless total now having doubled over the past 12 months, when two million people lost their jobs. In this same month, Spain for the first time in her history had over 4,000,000 people unemployed, an especially shocking figure even for a country which had become used to grim unemployment data. Although rapidly slowing, large scale immigration continued throughout 2008 despite the severe unemployment crisis, thereby worsening an already grave situation. There are now indications that established immigrants have begun to leave, although many that have are still retaining a household in Spain due to the poor conditions that exist in their country of origin.
has cut Spain's rating. On October 18, 2011 Moody's Rating cut Spain's rating by 2 notches from A1 to Aa2 with the outlook remaining negative. Standard and Poor's has downgraded Spain on October 14, 2011 and Fitch Ratings
cut it to the same level on October 7, 2011.
Late-2000s financial crisis
The late-2000s financial crisis is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s...
. In Spain, the crisis was generated by long term loans (commonly issued for 40 years), the building market crash which included the bankruptcy of major companies, and a particularly severe increase in unemployment, which rose to 21.4% in October 2011.
Spain continued the path of economic growth when the ruling party changed in 2004, keeping robust GDP growth during the first term of prime minister José Luis Rodríguez Zapatero
José Luis Rodríguez Zapatero
José Luis Rodríguez Zapatero is a member of the Spanish Socialist Workers' Party . He was elected for two terms as Prime Minister of Spain, in the 2004 and 2008 general elections. On 2 April 2011 he announced he will not stand for re-election in 2012...
, even though some fundamental problems in the Spanish economy were already evident. Among these, according to the Financial Times
Financial Times
The Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....
, there was Spain's huge trade deficit
Balance of trade
The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports...
(which reached a staggering 10% of the country's GDP by the summer of 2008), the "loss of competitiveness
Competitiveness
Competitiveness is a comparative concept of the ability and performance of a firm, sub-sector or country to sell and supply goods and/or services in a given market...
against its main trading partners" and, also, as a part of the latter, an inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
rate which had been traditionally higher than those of its European partners, back then especially affected by house price increases of 150% from 1998 and a growing family indebtedness (115%) chiefly related to the Spanish Real Estate boom
Spanish property bubble
The Spanish property bubble refers to the massive growth of real state prices observed, in various stages, from 1985 up to 2008 in Spain. The housing burst can be clearly divided in three periods: 1985-1991, in which the price nearly tripled, 1992-1996, in which the price remained somewhat stable,...
and rocketing oil prices.
The Spanish government official GDP growth forecast for 2008 in April was 2.3%. This figure was successively revised down by the Spanish Ministry of Economy to 1.6. This figure looked better than those of most other developed countries. In reality, this rate effectively represented stagnant GDP per person due to Spain's high population growth, itself the result of a then continuing strong level of immigration. Currently most independent forecasters estimate that the rate was actually around 0.8% instead, far below the strong 3% plus GDP annual growth rates during the 1997-2007 decade. Then, during the third quarter of 2008 the national GDP contracted for the first time in 15 years and, in February 2009, it was confirmed that Spain, along other European economies, had officially entered recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
.
In July 2009, the IMF worsened the estimates for Spain's 2009 contraction, to minus 4% of GDP for the year (close to the European average of minus 4.6%), besides, it estimated a further 0.8% contraction of the Spanish economy for 2010, the worst prospect amid advanced economies.
Property bubble
The residential real estate bubble in Spain saw real estate pricesReal estate pricing
Real estate pricing deals with the valuation of real estate and all the standard methods of determining the price of fixed assets apply....
rise 201% from 1985 to 2007.
€ 651,168,000,000 is the current mortgage debt (second quarter 2005) of Spanish
Spain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
families (this debt continues to grow at 25% per year - 2001 through 2005, with 97% of mortgages at variable rate interest). In 2004 509,293 new properties were built in Spain and in 2005 the number of new properties built were 528,754. 2004 estimations of demand: 300,000 for Spanish people, 100,000 for foreign investors, 100,000 for foreign people living in Spain and 300,000 for stock; in a country with 16.5 million families, 22-24 million houses and 3-4 million empty houses. From all the houses built over the 2001-2007 period, "no less than 28%" are vacant as of late 2008
House ownership in Spain is above 80%. The desire to own one's own home was encouraged by governments in the 60s and 70s, and has thus become part of the Spanish psyche. In addition, tax regulation encourages ownership: 15% of mortgage payments are deductible from personal income taxes. Even more, the oldest apartments are controlled by non-inflation-adjusted rent-controls http://www.jubilo.es/asp/pagina.asp?IDPagina=3360 and eviction is slow, therefore discouraging renting.
As feared, when the speculative bubble
Economic bubble
An economic bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values"...
popped Spain became one of the worst affected countries. According to eurostat
Eurostat
Eurostat is a Directorate-General of the European Commission located in Luxembourg. Its main responsibilities are to provide the European Union with statistical information at European level and to promote the integration of statistical methods across the Member States of the European Union,...
, over the June 2007-June 2008 period, Spain has been the European country with the sharpest plunge in construction rates. Actual sales over the July 2007-June 2008 period were down an average 25.3% (with the lion's share of the loss arguably happening in the 2008 tract of this period). So far, some regions have been more affected than others (Catalonia
Catalonia
Catalonia is an autonomous community in northeastern Spain, with the official status of a "nationality" of Spain. Catalonia comprises four provinces: Barcelona, Girona, Lleida, and Tarragona. Its capital and largest city is Barcelona. Catalonia covers an area of 32,114 km² and has an...
was ahead in this regard with a 42.2% sales plunge while sparsely populated regions like Extremadura
Extremadura
Extremadura is an autonomous community of western Spain whose capital city is Mérida. Its component provinces are Cáceres and Badajoz. It is bordered by Portugal to the west...
were down a mere 1.7% over the same period).
Banks offered 40-year and, more recently, 50-year mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
s. Unlike Ireland, Spanish labour costs did not track house market rises. While some observers suggest that a soft landing will occur, others suggest that a crash in prices is probable. Lower home prices will allow low-income families and young people to enter the market; however, there is a strong perception that house prices never go down. As of August 2008, while new constructions have come virtually to a halt, prices have not had significant movements, neither up nor downwards. The national average price as of late 2008 is 2,095 euros/m2
Prices
Due to the lack of own resources, Spain has to import all of its fossil fuelFossil fuel
Fossil fuels are fuels formed by natural processes such as anaerobic decomposition of buried dead organisms. The age of the organisms and their resulting fossil fuels is typically millions of years, and sometimes exceeds 650 million years...
s, which in a scenario of record prices added much pressure to the inflation rate. Thus, in June 2008 the inflation rate reached a 13-year high of 5.00%. Then, with the dramatic decrease of oil prices that happened in the second half of 2008 plus the confirmed burst of the property bubble, concerns quickly shifted to the risk of deflation instead, as Spain registered in January 2009 its lowest inflation rate in 40 years which was then followed in March 2009 by a negative inflation rate for the first time ever since this statistic was recorded.
Spanish banking system
The Spanish banking system has been credited as one of the most solid and best equipped among all Western economies to cope with the worldwide liquidity crisis, thanks to the country's conservative banking rules and practices. Banks are required to have high capital provisions and demand various proofs and securities from intending borrowers.Spain's largest bank, Banco Santander, took part in the UK government's bail-out of part of the UK banking sector.
Employment crisis
As for the employment, after having completed substantial improvements over the second half of the 1990s and during the 2000s which put a few regions on the brink of full employmentFull employment
In macroeconomics, full employment is a condition of the national economy, where all or nearly all persons willing and able to work at the prevailing wages and working conditions are able to do so....
, Spain suffered a severe setback in October 2008 when it saw its unemployment rate surging to 1996 levels. During the period October 2007-October 2008 Spain had its unemployment rate climbing 37%, exceeding by far the unemployment surge of past economic crises like 1993. In particular, during this particular month of October 2008, Spain suffered its worst unemployment rise ever recorded and, so far, the country is suffering Europe's biggest unemployment crisis. By July 2009, it had shed 1.2 million jobs in one year and was to have the same number of jobless as France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
and Italy
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
combined. Spain's unemployment rate hit 17.4% at the end of March, with the jobless total now having doubled over the past 12 months, when two million people lost their jobs. In this same month, Spain for the first time in her history had over 4,000,000 people unemployed, an especially shocking figure even for a country which had become used to grim unemployment data. Although rapidly slowing, large scale immigration continued throughout 2008 despite the severe unemployment crisis, thereby worsening an already grave situation. There are now indications that established immigrants have begun to leave, although many that have are still retaining a household in Spain due to the poor conditions that exist in their country of origin.
Government bond yields rise
In late 2010, Spanish 10-year government bond yields rose to over 5.5%, more than 2% higher than comparable German government bonds. In June 2011, the spread on the Spanish 10-year government bond versus the German 10-year government bond rose to over 2.70%.Ratings
For the third time in 13 months, Moody's Investors ServiceMoody's
Moody's Corporation is the holding company for Moody's Analytics and Moody's Investors Service, a credit rating agency which performs international financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized...
has cut Spain's rating. On October 18, 2011 Moody's Rating cut Spain's rating by 2 notches from A1 to Aa2 with the outlook remaining negative. Standard and Poor's has downgraded Spain on October 14, 2011 and Fitch Ratings
Fitch Ratings
The Fitch Group is a majority-owned subsidiary of FIMALAC, headquartered in Paris. Fitch Ratings, Fitch Solutions and Algorithmics, are part of the Fitch Group....
cut it to the same level on October 7, 2011.