New York Times, World News
Thursday, August 9, 2012
In Spain, after two decades of dizzying growth, the party is over.
For most of the last decade, Spain kept its fiscal house in strict order, running small deficits or even surpluses. The country enjoyed a long boom after joining the euro zone, as low interest rates fueled a surge in construction. The boom, while it lasted, gave Spain the world’s highest rate of homeownership — with more than 8 of every 10 Spanish households owning the places they lived.
But it came to an end with the 2008 financial crisis, and the resulting recession sent Spain’s unemployment rate soaring. Spain has also seen its deficits swell and has been forced to pay high interest rates as investors worried about its solvency. Given the size of the Spanish economy and the weakness of its banks, Spain has become the biggest worry facing the European Union.
Since 2010, Spain has pushed through a series of austerity measures meant to rein in its deficit.
In December 2011, Mr. Rajoy announced an austerity package consisting of $7.8 billion in tax hikes and $11.5 billion in spending cuts. Three months later, Mr. Rajoy had to announce that his government would not be able to meet the deficit targets it had promised, as the economy slid back into recession, depressing government revenues still further.
In April, Spain’s unemployment rate reached 24.4 percent, the highest in Europe and an especially stark figure given that the government had not yet begun to lay off public sector servants in any significant number.
The country’s banks were in even worse shape: an increasing number of debt-heavy Spaniards could no longer meet payments on mortgages that their banks were all too eager to give during the last decade’s boom. In May, Bankia, the nation’s largest real estate lender — requested an additional 19 billion euros in rescue funds from the country, far beyond initial government estimates. Spain’s borrowing costs rose toward the redline of 7 percent, even as Mr. Rajoy continued to insist that there would be no need for a European bailout.
On June 9, 2012, responding to increasingly urgent calls from across Europe and the United States, Spain agreed to accept a bailout for its cash-starved banks as European finance ministers offered an aid package of up to $125 billion. The decision made Spain the fourth and largest European country to agree to accept emergency assistance as part of the continuing debt crisis.
The original plan was for the European bailout fund to provide the money to the Spanish government, which would then use it to prop up the banks. But Spain objected after markets responded by driving up the interest rates the government had to pay, in a reflection of the extra debt it was taking on.
At a summit at the end of the month, European leaders agreed that the bailout funds could recapitalize banks directly.
To read the full article: http://topics.nytimes.com/top/news/international/countriesandterritories/spain/index.html