Introduction
Contrary to Prime Minister Mariano Rajoy denials of the countries pending bankruptcy,
Spain appears to be on the verge of accepting a bailout from the European Central Bank.
The government has already requested $125 billion for its banks that are bearing the brunt
of the economic crisis. Spain’s issues differ from that of the other three countries,
Portugal, Italy and Greece who had big debts they could no longer service. Spain’s
borrowing was controlled and had a balanced budget up to the 2008 financial crisis. After
joining the Euro zone Spain’s economy flourished especially in the housing sector that was
influenced by availability of cheap loans to home builders and buyers. But house prices
dropped, economic growth slumped from 3.7% per year in 2007 to only 1% in 2008. The
country had to borrow money to address the downfall in property value, the weak
economy and an unemployment rate that had escalated to nearly 20% ( BBC).
Factors that contributed to Spain’s financial crisis
Several factors contributed to the financial crisis in Spain. The Stability and Growth Pact,
which was intended to ensure that Member States maintain budget discipline in order to
avoid excessive deficits. It was established to safeguard sound public finances, based on
the principle that economic policies are a matter of shared concern for all Member States
and therefore would be coordinated at the European level. Despite the goal of a more
homogenous Euro zone economy, member nations criticized the limitations or lack thereof
that was put on a countries ability to implement its own economic policy. Member nations
with struggling economies would not be able to recover (Harrington).
Other contributing factors were Spain’s inability to regulate lending facilities and the
property market. An excess of real estate loans were issued by banks without being
properly disclosed to the central government. Unaware to the looming crisis, lawmakers
were unable to devise a plan to halt the economic downturn. The present recession could
have been triggered or made worse by unfavorable economic conditions in other countries
in Europe just as the 1993 recession came after economic slump in the U.SA.
Banks’ Woes
Before the credit crisis the banks were profiting from the booming housing sector. But the
bursting of the U.S.housing bubble caused the values ofsecuritiestied to U.S.real estate
pricingto plummet, damaging financial institutions globally. Questions regarding
banksolvency, declines in credit availability and damaged public confidence had an impact
on markets. This led to the banks struggling to pay back the loans while incurring huge
