Why you should worry about Spain

Spain is suffering a hangover from what economist Desmond Lachman of the American Enterprise Institute calls “the mother of all housing booms.”…

The bubble’s collapse crippled the economy, left cajas with large losses and vastly expanded government deficits. Unemployment is almost 24 percent; among those under 25, it’s 50 percent. Tax revenue has dropped sharply. In 2011, the budget deficit was 8.5 percent of the economy (gross domestic product). For 2012, the IMF projects a deficit of 6 percent of GDP compared with a target of 5.3 percent.

Spain’s predicament is agonizing. To borrow at reasonable interest rates requires convincing financial markets that huge deficits are being reduced. But cutting spending and raising taxes risk deepening the slump, widening the deficit and fostering more street protests. The dilemma is plain: Austerity may produce more austerity, while the absence of austerity may produce a crisis of confidence. In addition, Spain’s banks need more capital. Who will provide that?