Think Greece Is Scary? Now Get Ready For Spain

Business Insider: "
Spain has been under increasing pressure about its own sovereign debt position as dark clouds continue to swirl around its Mediterranean neighbor Greece. Their debt is huge, the banking system is troubled, and they had a monster housing bubble. Strictly speaking, the country may not be as bad as Greece, but when you consider how enormous Spain is, its troubles could make Greece look like child's play. Just consider this: Spain's GDP is $1.6 trillion. Greece's is $357 billion.

1. Property Boom: Spain experienced a property boom larger than the US and UK

Source: The Economist

This property boom saw the price of Spanish real estate rise 80% from 1990 to 2009.

This was due to similar reasons as those for the US and UK booms: relatively low interest rates and an easy credit environment.

2. Property Boom: Boom leads to employment growth and influx of workers

Source: http://www.indexmundi.com/g/g.aspx?v=72&c=sp&l=en

The property boom led to a period of relatively low unemployment in Spain and an influx of foreign workers and dependents from abroad.

Since the boom collapsed, this influx has only served to furtherexacerbate the unemployment problem.

Source: Index Mundi

3. Unemployment: 18.8%

Source: Instituto National de Estadistica

Spain's unemployment was a staggering 18.8% in the fourth quarter of 2009. This is a rise on the previous quarter's 17.9% and was above the consensus projections by 0.3%.

This is a return to the pre-boom time numbers, though higher than the year 2000 average of 16%.

Source: Instituto Nacional Estadistica

4. Unemployment: Increase looks set to continue to trend upward

Source: http://www.indexmundi.com/g/g.aspx?v=72&c=sp&l=en

Unemployment looks continue to trend upwards due to an increasing labor force and new austerity measures which will cut down on government spending.

The austerity budget is calling for a 5% cut in GDP and whileillegal immigrant worker numbers are decreasing, it appears unlikely the rate will be equal by any measure.

Source: Index Mundi

5. Euro Zone Imbalances: Inability to deal with labor problems

Source: OECD

Because of Spain's position in the Euro zone, it has been confronted with wage demands which are unfit for its less modern economy.

Spain cannot compete with Germany for the quality of its manufactured goods, as it cannot devalue its currency, lower wages, and become more competitive in the market place.

Source: OECD

6. Debt: During the boom times, it seemed as though Spain was doing well at paying down debt.

Source: Index Mundi

Spain, unlike Greece, used its period of growth to pay off debts and only had debt of 55% of GDP, which is the Euro zone average, prior to the crisis.

This should, theoretically, make servicing its debt easier as it has less.

Source: Index Mundi

7. Pension And Entitlement Schemes: Slash and Burn

Source: OECD

Spain has been on a slash and burn assault of entitlement programs since the severity of its recession became obvious.

Most obvious of these cuts is the raising of the retirement age to 67 from 65. This, coupled with cuts in the civil service, could make a strong impact on the country's deficit.

Source: OECD

8. No Growth Sectors In The Economy: GDP unlikely to grow swiftly

Source: Banca de Espana

The collapse of the property bubble has put Spain in a position of retrenchment in terms of where it sees its economy going.

It now needs to develop new growth sectors to grow its GDP. Likely candidates include energy, where Spain has invested heavily in solar technologies.

Source: Banco de Espana

9. Who is exposed: Financial Companies

Source: BIS

Compared to Greece, foreign bank exposure to Spanish government debt is limited. This does not mean that it isn't systemically large in certain countries banking sectors, however.

A primary example of this would be Cathay Life Insurance of Taiwan, which has significant exposure to Spanish debt. More interesting is which banks and or insurance companies have issued derivative instruments on Spanish debt, such as CDS.

These investors could be put under heavy pressure come July, when Spain has huge obligations to meet.

Source: Bank of International Settlements

10. Right now, Spain looks in good shape in debt markets

Source: Reuters

Spain is still in a position much better than the other PIIGS states. It does not have their debt load, nor the CDS spread of its rivals.

However, contagion via a European default or a prolonging of the Greek debt crisis could bring further pressure on the Spanish economy, which will result in higher CDS spreads and increasing yields on debt.

This week will see another Spanish debt issuance, this time of the 15-year variety, which will provide raw data on how markets perceive the country against its neighbors. Future months might hold more problems for Spain, however.

Source: Reuters

11. But July is D-Day for Spanish debt

Source: Barclays Capital via FT Alphaville

Barclays Capital finds that Spain is not one of the PIIGS most in need of debt refinancing over the next several months, but will be faced with huge obligations in July, according to the FT Alphaville.

Spain may be safe from the uncertainty over Greece right now, but come July things could get extremely difficult.

Approximately 25 billion Euros ($34.31 billion) in refinancing are needed in July, and Spain will have to tap the debt markets to get that. Spain can only hope the crisis over Greece is over by then, lest it might be dealing with its own.

Source: Barclays Capital via FT Alphaville

Financial Time's blog Money-supply today writes, that not only july, but next two years will be interesting:

Spain faces $200bn maturing debt

A troubling chart from Thomson Reuters this morning, showing Spain facing $203.7bn maturing syndicated debt in the coming six years. That is roughly a fifthof the country’s annual gross domestic product (which was $261.5m for Q4 last year). Italy is second with $95.9bn over the same period. Greece - orange on the chart - is almost insignificant in context.

Chart courtesy of Thomson Reuters; source Thomson Reuters LPC/DealScan
Maturing loans are significant as new debt will be needed to plug the gap. Countries perceived as risky will pay a higher ‘new issue premium’, as a mooted deal in Greece is currently showing. Two questions: who will be these countries’ creditor (China?)? And what are the figures for the UK & US (I’m working on this one)?


UPDATE


Upper graph shows maturing corporate debt, not sovereign. You can see volume of sovereign debt here... It looks like Italy is the king here.