Spain:Navigating through an Economic Crisis

Case Code: ECON043 Case Length: 19 Pages Period: - Pub Date: 2013 Teaching Note: Not Available

Price: Rs.500 Organization : - Industry : - Countries : Spain Themes: Economic Downturn

Abstract Case Intro 1 Excerpts

Abstract

The case discusses the economic crisis which hit Spain in 2007 and the various austerity measures taken by the government to beat the impact of this crisis. Triggered by the bursting of the housing bubble, Spain’s economy suffered a setback with its youth unemployment rate reaching 27% in 2013. Till 2007, Spain was a growing economy when its construction sector accounted for 12% of the country’s gross domestic product and housing prices were also at their peak. Banks from Germany and other countries financed many of Spain’s local and commercial banks. The country was an attractive destination for foreign investors too. However, behind this splendid growth, there was a growing property bubble which was waiting to burst.

The case also discusses how Europe’s fourth largest economy — Spain — fell deep into the crisis. The aftermath of the crisis was huge and engulfed the whole economy, resulting in the collapse of the banking system, increasing unemployment, a weakening construction and housing sector, and the overall deterioration of Spain’s economy.

Various austerity measures were taken up by the government of Spain to reduce public deficit. A cost cutting plan was initiated that involved reduction of salaries in the public sector and cutting or reducing other payments. Several regional banks or cajas were restructured, and a fund was incorporated. Many of the small banks were merged. A rescue package was provided for Spanish banks.

Mechanism and Creation of Asset Management company set up to manage the assets arising from the banks’ restructuring, helped in restructuring and consolidating the financial system of the economy. By 2013, the country was believed to be out of recession but not out of the crisis. Remarkable progress was noticed in fiscal correction and house price correction along with the private debt and external balance corrections.

Issues

The case is structured to achieve the following teaching objectives:

• Understand how Spain’s growing economy fell into a crisis
• Study how the housing bubble burst and affected the whole economy
• Analyze the impact of the Eurozone debt crisis on Spain’s economy
• Examine how the Spanish economy suffered after the property bubble burst

Contents

Introduction
The Origins
The Crisis
The Aftermath
Collapse Of The Spanish Banking system
Growing Unemployment
Shrinking Construction Sector And Housing Market
Deteriorating Economy
The Rescue Measures
Growing Unemployment
Austerity Measures
On Road Recovery
Exhibits

Keywords

Spain’s economy, Crisis, Recession, Housing bubble, Eurozone debt crisis, Unemployment, Construction sector, Cajas, Deficit, GDP, Austerity Measures, FROB, SAREB, IMF

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