The Spanish Public Debt, a New Bubble?

Miguel Sanchez de Pedro


Spain is different. In 2009 Spain was playing the "Champions League" with the best possible risk rating, Aaa -Moody's methodology-, rubbing shoulders with Germany, Denmark, France, UK, and the USA.

While other countries within the same privileged group (Germany, Denmark, and the USA) were able to successfully navigate the crisis and maintain their risk ratings at the top, in the Spanish case, the result was an eight notches downgrading of its sovereign risk, a disappointing Baa2, much closer to the junk level than to the highest note. This leveraging leaves little room for maneuver to finance future deficits.

With a Debt/GDP ratio of 140.5% -the higher level in history-, the situation may well cause that new public spending policies financed with more debt could lead to increased interest payable, whose perverse direct effects would be that of a reduction in social spending, and the added uncertainties about debt repayments and burden relief to the next generations.

Understanding the meaning of sovereign risks ratings and their direct influence on the planning of monetary and fiscal policies, should be a subject of required knowledge by those who assume the highest government responsibilities, be it that of the nation, autonomous regions or municipalities.

Likewise, understanding that political decisions involving spending or public investments must be financed by appealing to either the taxpayer through taxes, and/or the financial markets through the issuance of debt, requires the maximum care and diligence in the responsible maintenance of sovereign ratings within their comfort zone i.e. Investment Grade. Outside this area, the appeal to capital markets is almost an impossible and very costly mission. The markets in this globalized world follow their own rules; lending is the lender's wilful act to those who demonstrate solvency, nothing else.

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Banco de España’s statistical bulletin, July 2016


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Copyright (c) 2016 Miguel Sanchez de Pedro

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This work is licensed under a Creative Commons Attribution 4.0 International License.

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.