Private loans important factor behind Spanish crisis?

The other day came The Citizen Security Law  into force in Spain, which restricts the right to social protests. The law is the Conservative government’s response to popular discontent in the wake of the severe economic crisis, that started around 2008. But what caused the crisis? Here’s some notes on Spain.

1. Spain interesting case to understand the crisis

Spain is one of the countries where the 2008 crisis started first. The Spanish government debt fell sharply in relation to GDP before the crisis. And it is one of the countries hardest hit – unemployment has remained high since 2008. This is probably important and interesting, since if the crisis didn’t start at the same time everywhere we might be able to find some important information that help us understand the situation both in Spain and elsewhere.


Data from Eurostat

2. Low morale, high taxes, or generous unemployment benefits does not seem to explain the crisis

Ever since the 2008 crisis hit, there’s been a lot of talk about lazy Greeks and the PIGS. This kind of moral discussion often seems to spread, during crises. An argument in this tradition is that the crises happened because of low working morale, or low retirement age. None of this can explain an acute crises, developing over a few months. Data around the crisis 2008, also imply the contrary – the inhabitants of several of the crisis-affected countries worked relatively much compared to other countries (see graph here).

Many say that the countries affected by the crisis is in bad need of “structural reforms”, such as reducing unemployment benfits and taxes, deregulate markets, or implement other changes for more effective competition. There may be good reasons for such changes in many countries. High / low taxes, bad regulations or similar, may possibly create long-term sluggishness in the economy, low growth, high unemployment or other problems. However, none of these factors (as far as I know) creates acute financial crises. Therefor, none of this discussion helps us understand what’s been going on for the last couple of years.

Also, according to different empirical studies it is difficult to see any simple and direct relationship between structural factors and unemployment, for instance. Structures and institutions of course affects how people behave – but it’s not that easy that less unemployment insurance, lower taxes, and less regulation always lead to greater economic efficiency, increasing growth and higher employment.

3. Government debt can not explain the crisis

Many still seem to believe that the 2008 crisis started because of huge government debts. Nothing in the data I’ve seen indicate that this is acctually the case. Government debts began to increase after the crisis started, and mostly in the countries hit by crisis (chart here).

In several countries, government debt as a share of GDP even decreased before the crisis – including Spain. If the theory of the government debt as a cause for the crisis was correct, the risk of a Spanish crisis, also decreased before 2008 – not increased. In 2007, when unemployment begins to rise in Spain and the crisis started, the Spanish government debt was close to the average among OECD countries. At that time, the Spanish government debt had been declining  for 10 years. See chart below.

4. Private loans likely a major cause of the crisis

The amount of private loans increased substantially for a long time in Spain. When the growth rate begins to decline during 2007-2008, and private loans begins to decrease, unemployment rises and the crisis begins. The amount of private loans has continued to drop since in Spain, while the government debt have increased sharply. The fluctuation in private loans appears to be the single most crucial factor behind the depts of the Spanish crisis, as well as the crises in several other countries, around or since 2008.


Data from Eurostat and the BIS. Private loans deflated with CPI.

One explanation for how fluctuations in private loans may creates crises is that (1) when banks create loans, new money is created that may be used for consumption. When the loans are paid back, money may be lost that could have been used for consumption. (2) When the amount of loan decreases, or don’t increase at the same pace as before, this might reduce consumption, or making consumption slow down compared to before. This often decreases the demand for labor, leading to rising unemployment and other economic issues, such as trouble for banks etc.

Other mechanisms also contributed to Spain’s problems. Monetary policy in the EMU, which contributed to imbalances between labor costs and productivity. But variation in the amount of private loans seems to be the major cause behind when the crisis starts, and how deep the crisis has become in different countries.

5. Spain’s crisis starts before US

One theory put forward about the financial crisis of 2008 is that the crisis started due to global turmoil and uncertainty spreads after problems emerged in the US housing and financial markets. It is therefore particularly interesting to note that unemployment in Spain begins to rise in autumn 2007 – at least a year before the crisis started in the United States. However, what do happen late 2007 in Spain is that the rate of increase in the amount of private loans, begin to decline (slower credit growth).

Other European countries are not nearly hit as hard as Spain and in several of the countries that later end up with serious problems, these troubles starts at other times. This is no evidence that the US problem is not caused Spain’s crisis – but it seems more unlikely that this kind of US-spreading-fear-theory is the main explanation for the global financial crisis.

6. Similarities and differences Spain & Greece

The amount of private debt have increased in most OECD countries in recent decades. Around 2008 they began to decline in many countries – it was those countries that were hit by the crisis. E.g. Sweden suffered mainly indirectly through export markets. The amount of private loans has not decreased in Sweden since the 2008 crisis started.

Public debate (not economists in general) seem to have difficulties to grasp that fluctuations in private loans may cause financial instaiblity and also affect employment. Concerning Greece, many seems to confuse their current fiscal crisis (the government have ran out of money) and how the country’s problems started (private debt). These are two completely different things, even if they are partly linked. If fluctuations in the amount of private loans created the crisis in Spain – why can this not be the main cause behind the Greek crisis? Unlike many other theories, this thesis with data.

Although the 2008 crisis seems to have been started by similar mechanisms in different countries does not necessarily mean that the Spanish government will have the same problems as Greece. Although the Spanish government debt has increased, it is not near the Greek.Desstom seems the private debt burden after the crisis have eased in Spain while it worsened in Greece. Example based on readily available data: The amount of private debt in relation to GDP have declined in Spain since 2008, while liabilities increased in relation to GDP in Greece.


Data from Eurostat. Why is Greece in so much trouble if their private debt in relation to GDP is lower than Spain’s? Both countries have enormously high unemployment. And it is difficult to make direct comparisons between countries on these measures. Partly, because of difficulties in measurement methods, and partly because local factors are crucial to how the economy is affected.

On the other hand, maybe the problems will come later? The Spanish government debt have risen sharply in relation to GDP. Unemployment is still extremely high and the private sector still has a large amount of debt. The current form of EMU prevents a more substantial expansionary fiscal policy, which could push unemployment down while the private sector reduces its debt. We’ll see, I guess.


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