uploads///Ray Dalio Spain

Spain’s Economy Is Facing a Deleveraging Dilemma

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Oct. 7 2015, Updated 6:37 a.m. ET

Spain is facing a deleveraging dilemma

The ratio between government debt and the GDP (gross domestic product) for Spain has been rising at a high rate. It reached 97.7% by the end of 2015. The crisis started in 2008. Now, it has stabilized. Debt burdens have reduced against what they were at the start of the deleveraging. Before the bust took place, there was an infusion of capital. Also, productivity fell and a housing bubble was created. In 2007, Spain held the second highest current account deficit globally taken in absolute terms.

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Challenges facing the Spanish economy

In sharp contrast to the reforms taken by the US, the problem that Spain has been facing is that even though the fiscal policies are governed by the Spanish government, the monetary policies are defined by the ECB (European Central Bank)—the central bank that overlooks the Eurozone. As a result, Spain isn’t able to print money directly in the form of a QE (quantitative easing) program to suit its requirements and control the deflationary forces. Spain’s government bond yield holds significant levels of credit risk because of its inability to print money. However, the ECB enacted a bond-buying program. It has been infusing liquidity into Spanish banks in order to prevent a severe deleveraging cycle. The ECB has worked out long-term refinancing operations to push money through sovereign and covered bond purchases in risky assets.

Impact on the market

Looking at the iShares MSCI Spain Capped ETF (EWP) from March 2008 to the current levels, it lost more than 50% of its value.

In contrast, Spanish ADRs (American Depository Receipts) including Banco Santander (SAN) lost nearly 75% of its value while BBVA (BBVA) and Telefonica (TEF) lost more than 50% of their value. Grifols (GRFS) was listed on the NYSE in 2011. Its price rose during this timeframe.

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