On Sunday, a small-yet-decisive minority of Greek voters decided that they’d rather endure years of grinding austerity than risk an exit from the euro. Financial markets heaved a sigh of relief for, oh, three hours or so — before they remembered that the real crisis in Europe is still in Spain and panicked again.
After all, Greece is a fairly small country, with a GDP of about $300 billion (and shrinking!). Spain’s GDP is about $1.4 trillion, the 13th-largest in the world. And Spain’s very much in trouble. Three simple charts should show this. First, new data from the Bank of Spain showed that the number of “bad loans” made by Spanish banks is at its highest level in two decades:
That means there's a risk that Spain's banks could sustain big losses in the future. And who’s on the hook for these banks? The Spanish government, which has made all sorts of implicit guarantees to its financial sector and local governments, as Sober Look explains:
When you add up all of these “contingent guarantees” to Spain's official debt, notes Kostas Kalevras, you get a number that's more than 100 percent of Spain's GDP. And as a result, few people want to keep lending the Spanish government more money. On Monday, Spanish bond yields spiked to record levels — well past the 7 percent mark, which is the level at which Greece, Portugal, and Ireland all needed bailouts:
As Wolfgang Munchau observes in the Financial Times, one possible solution here is for the euro zone as a whole to inject money directly into Spain’s banks — rather than having the Spanish government continue to borrow unmanageable sums of money to prop up its banking system. But European officials are still wrangling over the exact details of how to do this. (See Lisa Pollock for the headache-inducing details on this.)
Still, Munchau notes, if Spanish bond yields keep rising without end and Spain can no longer borrow money, it might eventually have to leave the euro. After that, Italy could follow. And that would be a catastrophe. “If Italy and Spain were to leave the eurozone,” Munchau writes, “they would probably also default on their foreign debt. Such an act would probably cause the European financial system to collapse.” Doom!
So Spain is still in crisis. And nothing about the Greek elections changed that.