The news from Spain is dire: its local governments are bankrupt and we can expect a domino effect. The cause? Overspending:
Spain’s debt hangover follows an era of cheap credit that the birth of a common currency helped create. When the eurozone economy was booming, investors buying euro-based bonds accepted the same interest rates whether the debt was floated by Germany or by Greece.
In Spain, those lower borrowing costs sparked a housing boom much like the buying and building frenzy unleashed by low rates in the U.S. The result was a windfall, in the form of building permits and fees, for Spain’s regional governments. Those governments, in turn, took advantage of cheap credit to embark on their own building sprees, sinking billions of euros into new roads, parks, airports and government buildings to house expanded payrolls of government workers.
Now that the property boom has gone bust and the Spanish economy is contracting, the regional governments can’t raise enough revenue to pay the bills and make their debt payments. Fearful of debt defaults, investors are now balking at lending money that the regional governments need to roll over existing debts. Red the rest
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