1. 0 INTRODUCTION
Started from 1990 until early 2000, Spain has experienced a strong economic growth based on its credit-driven domestic demand. Spain was the 4th largest economy in the 16 nation Euro Zone and it was the 10th largest economy in the world. Analysts believe that if Spain defaults, it would ultimately lead to the breakup of the Euro Zone. Furthermore, Spain had low-interest rates that triggered consumption, external imbalances and also a real estate boom in its economy.
A financial crisis is a situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated with a panic or a run on the banks, in which investors sell off assets or withdraw money from savings accounts with the expectation that the value of those assets will drop if they remain at a financial institution. A rapid string of selloffs can further result in lower asset prices or more savings withdrawals. If left unchecked, the crisis can cause the economy to go into a recession or depression.
Since 2007 the world economy has undergone a phase of marked instability. The Eurozone debt crisis was the world’s greatest threat in 2011. Things only got worse in 2012. The crisis started in 2009 when the world first realized Greece could default on its debt. In three years, it escalated into the potential for sovereign debt defaults from Portugal, Italy, Ireland and Spain. The European Union, led by Germany and France, struggled to support these members.
Spain is one of the main countries at the centre of the financial crisis in the Eurozone. In 2008, Spain was badly affected by the global credit crisis. The Spanish property market collapsed leading to a deep recession, which persisted for several years. Since 2008, Spain has seen a sharp fall in GDP due to a combination of first, overvalued exports. Second is EU recession. The third is Austerity policies (government spending cuts). Last but not least is a collapse in the property market and banking crisis.
2.0 SPANISH FINANCIAL CRISIS
2.1 THE CAUSES OF THE CRISIS
There are two major causes that lead to the 2008 Spain crisis. The first causes are the falling of the stock market in United States. Spain using Euro currency. Due to this falling, it quickly infecting worldwide such as bank stopped giving credit to people. At Spain, the main factors that lead to too much credit loan because it is easy to credit condition during that time period which also encouraged high-risk lending and borrowing practices.
Next, an investor also stopped buying debts and the panic sparked off. No one is willing or able to landing any money, it provides dominoes’ effect and the unemployment rates also increase. In Spain unemployment rates rise from 8.3% in late 2007 to 20.1% in late of 2010 which is almost 4, 632,000 people remain unemployed. It made Spain the highest rate of unemployment among the European Union. The highest rate Spain faced in 2009 which is the unemployment rate exceed 60.2% This will lead to the decrease of buying power, economy decreased, employers start to eliminate workers and family being kicked out from the house because cannot pay their homes for non-payment.
Second main causes are the collapse of building a business. Since General Francisco Franco’s dictatorship in the 1950s, Spain economy is depending on real estate and construction. The construction and property development sectors in Spain had an essential role in the detonation and extension of the current economic crisis. For many years, Spain strategy is working. Spain has the highest rates in a level of the private home that made U.S. rate below them which is 87% compared to the U.S. only 70%.
Before, housing price will always go up and not going down. But in Spain due to a collapse of U.S stock market led to a downturn in Spain economy. No one able to buy house or property. There are 1.6 million unsold properties in Spain. The disproportionate growth of housing prices has led to a housing bubble of enormous proportions. Housing bubble always starts when there is an increase in demand but have limited of supply. The bubble gets burst when at the same time demand decrease while the supply increase it will result in the price sharply drop. Investors or speculators who enter the market and driving demand in the market also led to the drop in the price and the speculative bubble popped.
Spain housing prices kept falling or dropping until 15.2% over the year. The example of property or development that went into like a ghost town such as the town in Valdeluz that being constructed for around 30000 people, but only have 700 people in the town in 2011. There is also ghost airports such as Castellon-Costa airports and Ciudad Real Central airports, etc.
2.2 THE IMPACT OF THE CRISIS
The impact of the crisis on employment in Spanish was destroying its economy. From the first until the end of the crisis in 2010, the amount of person who was jobless extended by 152%, up to 4,632,000 laborers. The major reason was the housing crisis which impacts the level of employment in Spanish. In the more prominent power seasons, around 2008 and 2010, work issues in the Spanish development sector including the higher which was real estate. The decline in the business’ rate is escalated in the Spanish case by generally high weight that employment in the development sector had in the business’ aggregate toward the beginning of the crisis. Another reason was the structural criteria’s of its labor market. It can be described by a strong unbending nature of wages and hours worked and by an extraordinary specialist’ division. This division brings about a double labor market where workers with high wages and guaranteed by high severance pay coincide with low wage earners with little confirmation. The alterations are for the most part delivered at the cost of the last due to their lower level of productivity. Consequently, joblessness rates inside this sector are altogether more than the ordinary.
2.2.2 ECONOMIC DOWNTURN
The Spanish economy was still amidst of an unprecedented double-dip recession and it will take time to digest the implosion of the biggest real estate bubble fall in the country’s history. Spanish GDP declined by 0.3% in the early three months of 2012, the second returning to the rebound, given the country’s saving measures and widespread economic slowdown hit growth. Currently, there are eight Euro Zone nations in recession, plus three different individuals from the European Union. Spain’s monetary outlook remained uncertain in late 2012. The European Central Bank reacted toward the start of September by revealing that it would buy unlimited of Spanish securities if the government applied for help from the Eurozone support fund, bringing yields down underneath 6 percent all of sudden since April. An interpretation for this was the generally dispute view that it is almost impossible for a government to survive the political consequences of a bailout. Additionally, there was serious concern about the impact this would have on Spain’s long-term reputation and validity.
2.2.3 DECLINE IN CREDIT
Credit for development and property improvement activities was the minimum of sending the housing crisis to the banking sector. During the pre-crisis period on 2004 until 2007, credit to the development sector experienced an average yearly development of 24.6%, while credit to the real estate sector creates at a normal yearly rate of 43.1%. In 2007 loans to both sectors represented for almost 45% of the Spanish GDP where 14.5% for development and 30% for its property improvement. This unbalanced improvement of credit has brought to high risk of centralization in the property and development improvement sectors, both on supply and demand side, following the lack of risk policies of the current banking system and supervision of Bank of Spain. The huge stock of real estate assets, whose development or purchase is funded by bank loans, remains in the balance sheet of financial entities and during the recession period with current demand deficit, resulting in default catastrophe and resource devaluation and affecting bank turnovers.
2.3 THE SOLUTION
Recovering from the global economic and financial crisis has proceeded more slowly in Spain and unemployment has stayed above 20%. The need to reduce high levels of business and household debt, compounded by the large government deficit, will continue to dampen the recovery, while the construction sector will continue to be held back by the oversupply of housing.
In the context of the European debt crisis, the risk premium on Spanish government debt remains high; and, funding costs for the private sector could also rise significantly if the crisis persists. To deal with this scenario, policies are needed to improve investor confidence, boost exports and diversify economic activity and the productive fabric.
In view of the current macroeconomic situation in the Eurozone, the most immediate needs are to restore confidence in the banking system and to take decisive action like increases the capital requirement to reduce fiscal deficits. In the medium term, the priority is to spur competitiveness and productivity by reforming labor and product markets. Other solutions that also recommended by Organization for Economic Cooperation and Development (OECD) for Spain Financial Crisis are continued improving fiscal sustainability, complete the restructuring of the savings banks, push reform of collective bargaining further, and last but not least boost productivity growth.
3.0 MAJOR DIFFERENCES
By comparing the Asian and Eurozone crisis we can see the differences of both crisis. Asian crisis involved Malaysia, Singapore, Thailand and Korea. While Eurozone involves such as Spain, Greek, etc.
The first differences are how the countries have driven their account deficits. For Asian countries the driven by domestic investment while for Eurozone countries the account deficits were caused by rising consumption and declining national savings.
Next differences, the fiscal policy. Asian countries such as Malaysia maintained a fairly high degree of fiscal discipline while Eurozone countries such as Spain ran the fiscal deficits.
Thirdly, debt positions. Malaysia has large external debt positions mainly due to excessive borrowings by their public sector. For Spain, their large external debt positions due to the excessive borrowings by their respective private sector.
Next, from a currency perspective. Malaysia governments allowed their currencies to depreciate in nominal terms to regain external competitiveness. While Spain constrained due to the common regional currency, the Euro.
Lastly, how IMF responded to the crisis. In Asian countries, IMF responded slowly but in Eurozone, they responded faster towards the crisis.
The last few years show how Spain struggle because of the limitation of an old economic model that relies on a housing bubble and unsustainable private debt. From the crisis in Spain, we should take a lesson learned. The burst of the real estate bubble produced a very strong shock on economic activity and employment.