Spain's external debt amounted to €1.78trn in the first quarter of 2012. (CORBIS)
Despite the austerity measures introduced by Prime Minister Mariano Rajoy’s government over the last six months, the Spanish external debt has not decreased. Instead, it continued to grow during the first quarter of this year, according to a new report published by the Bank of Spain.
The external debt amounts to €1.78trn, which is €22.6bn more than the previous quarter. On an annual level, the debt grew by €70bn, which shows the difficulties to clean up the balance of payments in the Spanish economy. Spain now owes an amount equivalent to 167 percent of its gross domestic product to foreign creditors.
When taking into account the international investment position of Spain, which is the most representative indicator, the result is adverse.
The net foreign debt (the balance between the amount owed to Spain by lenders abroad and the amount owed by Spanish entities to foreign creditors) remains at €977.6bn, which is the same level as the year before.
External debt tripled in a decade
To realize how much this indicator of solvency has increased, one must bear in mind that the external debt in 2002 was only slightly above €303bn, which means that it has tripled in only a decade.
At least close to 90 percent of the gross debt is denominated in euros, which tends to mitigate the exchange rate risk. It is a percentage that exceeds the Eurozone average, which is at about 70 percent, but while the gross debt of the Eurozone tends to decrease, that of Spain continues to rise.
Logically, this is linked to the financing of the Spanish economy, both in the public and private sectors. In its report, the Bank of Spain’s points out that in the current environment of financial tensions, it is particularly important to evaluate the short-term financial risks of the external debt, primarily that of the banking sector, which has had to get into extraordinary debt in order to finance the economy.
The statistics from the Spanish central bank show that the financial entities owe about €655bn to foreign creditors, although there has been a considerable reduction of above €60bn as a result of the deleveraging process. Despite this, they are still extremely dependent on financing by the central bank, which has had to make two massive injections of liquidity by a trillion of euros to compensate the closure of the interbank market. With this money, the banks tackle the maturity of their debt.
This improvement, however, has been neutralized by the monetary authority that has had to take in more debt, by over €101bn, to compensate the financial tensions.
The public administrations, on the contrary, have reduced their debt by close to €20bn, but despite this, their liabilities to foreign creditors exceed €255bn.
The external debt of a country, as defined by the International Monetary Fund, includes the balances of all liabilities to creditors that are not residents in the country that will be repaid by amortizations, by interests or by both concepts. That means it includes all financial instruments except for equity participation or derivatives, given that these instruments don’t necessarily require these payments.
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