Will Spain be the next victim of the crisis?

May 5, 2012

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
For a while it seemed as though the Eurozone crisis was no longer an issue. Since Greece's last bailout early in the year, there has been little further news concerning the Eurozone crisis. That has all changed in the last few weeks. Spain now occupies the forefront of the news surrounding the debt crisis. Recently, the Spanish government issued bonds and yields were near 5%.

So what are the facts about the Spanish economy? Why are they in so much trouble? First, let's look straight at the debt. They currently run a budget deficit of just under 10%. This is fairly high, and around the same levels as Greece. Their debt to GDP ratio stands at 60%. This is actually below most other developed economies, and is not an unsustainable figure, provided their bond yields do not spiral out of control.

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The Spanish economy is also in a recession. They have had negative growth over the last two quarters, and this trend looks set to continue. The most worrying statistic for Spain is the unemployment rate. Roughly one out of four or 25% of Spaniards is unemployed, an extremely high level. What is even worse is youth unemployment. Unemployment for those less than 25 years of age is one out of two, 50%.

What is interesting about the Spanish situation is that their economic indicators are very poor, but there is little reason to suggest an impending debt crisis. They run budget deficits similar to levels seen in the USA and the UK, and their debt to GDP ratio is considerably lower. Spain does need to cut its deficit, but there is no impending crisis given the numbers.

The real crisis that is taking place in Spain is unemployment and recession. Such high unemployment levels lead to recession and lower tax revenues, all of which impact the government's budget deficit. The longer such high unemployment persists, the worse the long-term prospects for the country become. Long-term unemployment is much more difficult to fix than short-term unemployment.

The problem with labeling the Spanish situation as a debt crisis is that we are made to believe that reducing the deficit will solve the problem. The real problem is unemployment and recession. This is the case for many other European countries, and not just Spain. Spain may very well end up as a victim of this crisis, but primarily because we have not correctly diagnosed the problem.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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1 Responses to "Will Spain be the next victim of the crisis?"

Kuldeep

May 6, 2012

Mr. Dossani, you are absolutely correct. But a bigger unemployment problem is looming of humungous proportions in India. Every year millions are becoming eligible for jobs ... but where will the jobs come from? Couple this with a thoroughly skewed gender ratio ... and we are looking at a looming unrest in the populace which will make Egyptian & Libyan revolts seem like a kiddie party. People like you and others who hold influential positions must sound the warning bells. Please shake these stupid nero-like politicians into action for otherwise as Bob Dylan sang, "The times they are a-changing!!"

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