Bracing for the coming crisis

It is fortunate that Spain’s debt crisis has calmed down a bit thanks to the European Union’s rescue plan.

The global financial markets have been sending disturbing signals about the danger of insolvency, and there was a consensus in the international market that Spain could not avert bankrupcy of its banks on its own. Yet it persistently refused to accept bailout offers for fear of inviting interference in domestic affairs. This sentiment made the whole world nervous because major bankrupcies in Spain would have an immense ripple effect on the world economy.

But luckily, Spain eventually requested a financial bailout, and the EU was willing to help, providing financial assistance as large as 100 billion euros ($126 billion). The move could help extinguish an ominous fire for now. However, we can hardly deny the possibility that the bailout may signal a bad omen for the health of the world economy.

For Spain’s part, the monetary injection is nothing but a temporary stop-gap measure rather than a permanent solution. Spanish banks’ insolvency goes far beyond what can be cured by a transfusion of 100 billion euros. For instance, the size of its three major banks’ debt hit two trillion euros as of last December, which amounts to nearly double the country’s GDP. Of the figure, mortgage loans with little, if any, possibility of repayment exceed 180 billion euros.

Against this backdrop, Spain’s real estate prices continue to fall. Moreover, as the economy cools down rapidly, citizens’ ability to repay their debt is quickly dwindling: One out of four people is jobless and one out of two young people are unemployed. That’s why some economists say this is just the beginning of Spain’s financial crisis and that the problems won’t be limited by national borders. Even Germany will probably be put into a dangerous situation.

Given the seriousness of these issues, we should not take even a moment to breathe after the EU’s bailout for Spanish banks. Instead, we must devise a detailed and reliable contingency plan to prepare for further crisis in the euro zone with a particular focus on problems that could affect the foreign exchange market.

The government must also keep in mind that a financial crisis can lead to a widerspread recession. It must closely monitor how Spain’s crisis evolves to brace for what is yet to come.