Spain Credit Crisis Causing Alarm

If Greece is Bear Stearns, Spain is Lehman Brothers.

The debt troubles in Greece have dominated the headlines. But the financial troubles in Spain, a much larger country, are a bigger worry, according to experts at the Wharton School. "Because of its size, Spain's success in reversing its fiscal deterioration is critical for the future of the euro, the European Union and, ultimately, the global economy," according to an article at knowledge@wharton.com/. "If Spain fails to execute a credible plan to cut its budget deficit, the worries over sovereign solvency will spread quickly beyond the small, peripheral countries currently making the most headlines, experts warn. A Spanish default could herald the breakup of the euro and a rise in retaliatory protectionism around the world."

The article points out that the thought of a bailout is not going over well among government officials in Madrid, who are quick to blame their problems on the global press. But it says those factors are of marginal importance. The bursting of a massive construction bubble is really to blame.

It will be tough to bring debt, now 11.4 percent of GDP, under control, given the poor economy. "Spain's GDP shrank by 3.6 percent in 2009. Another contraction is expected in 2010, in contrast to forecasts for growth in most other large developed countries. Unemployment currently stands at 20 percent, double the rate of two years ago," according to Wharton.