The Spanish Crisis: Background and Policy Challenges

Resumen

This paper reviews the background and key policy challenges of the critical situation faced by the Spanish economy in May 2010. It describes the strengths and weaknesses of Spain's recent long growth cycle, the real and financial imbalances accumulated towards its end, and the troubles face at the point in which international investors started questioning about the solvency of the banking sector and the government. Particular attention is paid to the developments in private and public sector finances and, specifically, to their implications for comercial and saving banks. Attention is also paid to the political-economy background, especially in regards to the undertaking of structural reforms. It is argued that recent external pressure, partly initiated by unjustified catastrophic expectations about Spain, provides an opportunuty for accelerating the reforms needed to resume strong growth.