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Spain Will Default (or Need a Bailout).

In Debt on April 2, 2011 by CQCA

Spain’s sovereign debt has exploded since the crisis began. Between February, 2010, and February, 2011, Spain’s debt increased 17.5%. Investors fear that the problems in Greece and Ireland will spread into Spain, but Spain’s economy is much larger than Greece, Ireland, and Portugal’s economies, combined.

Spain’s debt-to-GDP ratio has risen from 32.94% in 2008 to 50.88% in 2010. But a much more important indicator is the maturity of that debt.

Spain owes €120 billion by the end of 2011, and 45% of its €557 billion debt by 2013. According to the OECD, the Spanish government spent €482.6 billion in 2009. The central government would have to cut 24.86% of its 2009 budget just to pay debt maturing in 2011. That would involve cutting all the money it spent on defense, public order and safety, environmental protection, housing and community amenities, recreation, culture, religion, and education.

However, instead of making cuts, the Spanish government has been pushing debt further out into the future.

The Spanish government has decreased the issue of treasury bills with a maturity of less than one year. The total amount of 18 month, 3 year, 10 year, and 15 year bonds have all increased by at least 10% since February, 2010.

About 45% of Spain’s debt is held by Spanish banks. According to the Bank of Spain’s February, 2011 Statistical Bulletin, the Spanish financial institutions had €4.6 trillion worth of liabilities in December, 2010. But Spanish banks are not the largest group of holders of Spanish sovereign debt, foreign governments, institutions, and persons are.

France, Germany, and Italy are the largest holders of Spanish debt. If Spain defaults, this could cause contagion to spread into Western and Central European governments.

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