Spain and Italy in

eurozone crisis

SPAIN• The 2008–2013 Spanish financial crisis began

as part of the European sovereign debt crisis.

• Spain went into recession in 2008 Q2 and remained there until 2010 Q1, when a modest recovery ensued that came unstuck in the second half of 2011 again it continue to rise from 2012 onwards, as the sovereign debt crisis heightened and spread to an increasingly large number of countries.

• Spain continued the path of economic growth till 2004 but there were some fundamental problems already evident in the economy:

Spain's huge trade deficit (which reached a staggering 10% of the country's GDP by the summer of 2008).

The "loss of competitiveness against its main trading partners“.

An inflation rate which had been traditionally higher than those of its European partners.

Especially affected by house price increases of 150% from 1998.

A growing family indebtedness (115%) chiefly related to the Spanish Real Estate boom and rocketing oil prices.

• In Spain, the crisis was generated by:Long-term loans (commonly issued for 40 years)The building market crash, included the

bankruptcy of major companies.Particularly severe increase in unemployment,

which rose to 29.16% by April 2013.

• The economy contracted 3.7% in 2009 and again in 2010 by 0.1%. It grew by 0.7% in 2011. By the Q1 of 2012, Spain was officially in recession once again.

Contraction time

Property bubble

• The residential real estate bubble in Spain saw real estate prices rise 200% from 1996 to 2007.

• In a country with 16.5 million families, 22–24 million houses and 3–4 million empty houses. From all the houses built over the 2001–2007 period, "no less than 28%" were vacant as of late 2008.

Prices• Spain has to import all of its fossil fuels,

added much pressure to the inflation rate.

• Thus, in June 2008 the inflation rate reached a high of 5.00%.

• This led to rise in prices, implementation of austerity measures and extremely high unemployment.

Spanish banking system• Spanish banks were very conservative in rules. But became liberal

during property bubble.

• Banks helped many congress representatives to own multiple number of houses which left banks with big debts.

• Banks had lent to construction companies heavily until they got bankrupt and ultimately banks also.

• In May 2012 credit ratings of several Spanish banks were downgraded, some to "junk" status.

• On 25 May it announced that it would require a bailout of 23.5€ billion to cover losses from failed mortgages.

Huge unemployment• During the period October 2007 – October 2008 Spain

had its unemployment rate climb 37%.

• Spain have two tiers of labor force privileged and unprivileged.

• June 2013, is overstated. Subtracting students and young mothers not looking for jobs, the actual number of young unemployed labors is closer to 22%.

• Young people are leaving Spain in search of job. Roughly about 68% are willing to do so.

Bail out of Spain• On 9 June 2012 the Eurogroup announced

intentions to provide up to 100,000 million euro to the Fund for Orderly Bank Restructuring to the Spanish government.

• EU Economy and Euro Commissioner Olli Rehn

told a news conference on 13th November 2013 that the Spanish financial market had stabilized, liquidity of banks had improved and deposits were rising.

ITALY• After joining eurozone, from January 2002 all

coins and notes of Italy changed from Lira to euro.

• Exports got reduced and currency started devaluating more since then.

• Italy is the third largest economy of the Eurozone holds the largest public debt (over €2 trillion), which has been growing at an astonishing pace, particularly as a ratio to GDP (130%).

Causes• Debt

country's national debt weighs in at roughly 120% the size of its GDP, or about $2.6 trillion.

2nd largest debt .• Productivity

The IMF found that Italy suffered from excessive regulation and a dearth of R&D spending.

The economy is dominated by small and medium sized businesses so, its capital markets are poorly developed.

Young Italians, have an unemployment rate above 27%.

• Government and MafiaWeak governance.Increasing corruption and weak-biased rules.More than 15% of Italy's economy happens in the

shadows.Government forcing citizens to pay heavy taxes.

• South ItalyGDP per capita in the North and center is more

than 40% higher than the south.Unemployment, crime, and black market labor are

also concentrated in the South.

Regional impact

• Low Family income.

• Low Industrial production.

• Unemployment rate.

NorthSouth

North

South

Bailout• The Bank of Italy has approved €3.9bn in loans

to fund a deeply controversial state bailout of the world’s oldest bank, Monte dei Paschi di Siena.

• Monte dei Paschi, founded in 1472, faces losses of up to €720m over a series of trades, several of which are now under internal investigation.