2008–2014 Spanish financial crisis

The 2008–2014 Spanish financial crisis, also known as the Great Recession in Spain^[1][2] or the Great Spanish Depression, began in 2008 during the 2008 financial crisis. In 2012, it made Spain a late participant in the European sovereign debt crisis when the country was unable to bail out its financial sector and had to apply for a €100 billion rescue package provided by the European Stability Mechanism (ESM).

The main cause of Spain's crisis was the housing bubble and the accompanying unsustainably high GDP growth rate. The ballooning tax revenues from the booming property investment and construction sectors kept the Spanish government's revenue in surplus, despite strong increases in expenditure, until 2007.^[3] The Spanish government supported the critical development by relaxing supervision of the financial sector and thereby allowing the banks to violate International Accounting Standards Board standards. The banks in Spain were able to hide losses and earnings volatility, mislead regulators, analysts, and investors, and thereby finance the Spanish real estate bubble.^[4] The results of the crisis were devastating for Spain, including a strong economic downturn, a severe increase in unemployment, and bankruptcies of major companies.^[5]

Even though some fundamental problems in the Spanish economy were already evident far ahead of the crisis, Spain continued the path of unsustainable property led growth when the ruling party changed in 2004. In these times Spain had already a huge trade deficit,^[6] a loss of competitiveness against its main trading partners, an above-average inflation rate, house price increases, and a growing family indebtedness.^[7] During the third quarter of 2008 the national GDP contracted for the first time in 15 years, and, in February 2009, Spain (and other European economies) officially entered recession.^[8] The economy contracted 3.7% in 2009 and again in 2010 by 0.1%. It grew by 0.7% in 2011.^[9] By the 1st quarter of 2012, Spain was officially in recession once again. The Spanish government forecast a 1.7% drop for 2012.^[10]

The provision of up to €100 billion of rescue loans from eurozone funds was agreed by eurozone finance ministers on 9 June 2012.^[11] As of October 2012, the so-called Troika (European Commission, ECB and IMF) was in negotiations with Spain to establish an economic recovery program required for providing additional financial loans from the European Stability Mechanism (ESM). In addition to applying for a €100 billion bank recapitalization package in June 2012,^[12] Spain negotiated financial support from a "Precautionary Conditioned Credit Line" (PCCL) package.^[13] If Spain applied and received a PCCL package, irrespective to what extent it subsequently decided to draw on this established credit line, this would at the same time immediately qualify the country to receive "free" additional financial support from the European Central Bank (ECB), in the form of some unlimited yield-lowering bond purchases.^[14][15]

The turning point for the Spanish sovereign debt crisis occurred on 26 July 2012, when ECB President Mario Draghi said that the ECB was "ready to do whatever it takes to preserve the euro". Announced on 6 September 2012, the ECB's Outright Monetary Transactions (OMT) program of unlimited purchases of short-term sovereign debt put the ECB's balance sheet behind the pledge. Speculative runs against Spanish sovereign debt were discouraged and 10-year bond yields stayed below the 6% level, approaching the 5% level by the end of 2012.^[16][17][18]