What we owe

Spain owes about 320 percent of its Gross Domestic Product (GDP), or, in absolute terms, around 3.3 trillion euros. We would have to be hard at work for more than three years, paying and spending nothing, to pay off this huge debt. If it made any sense to reduce this to an average, each Spaniard would owe about 72,200 euros. The huge debt and the extraordinary level of unemployment are what distinguish us from our neighbors, and make us "special."

The shares in this debt are, roughly: 200 percent private and 100 percent public. The latter is growing, while the former is gradually diminishing, though starting from very high levels. This proportion indicates where the main problem of recent years has lain: much more is said about the problem of the public sector than that of the private as causes of the difficulty. In the private sector, we distinguish between the debt of households (80 percent of GDP) and company debt (130 percent of the same).

Some weeks ago José Viñals, of the IMF, said "42 percent of Spanish company debt cannot be paid off without resorting to refinancing," which means the interest to be paid on it exceeds gross annual company profits. So high a percentage (against 30 percent in Italy and 47 in Portugal, to give two neighboring references) is a risk to the banking systems, which cannot be overlooked in any analysis of the possibilities of recovery, and in part explains why banks are afraid of lending money.

Economic policy must attempt to stabilize the inherent instability in the system

This situation once again recalls the theory on the natural instability of the financial system developed in the 1980s by Hyman Minsky, now reproduced in German fund manager Georg von Wallwitz's book Odysseus und die Wiesel.

Minsky held that financial markets always pass through three stages, repeated cyclically. In the first, investors are not greedy and value security above all else; acquisitions are financed in a conservative manner, and income covers interest and the repayment of loans. The investor says "things cannot go very wrong if the credit I have requested to finance a building, or to buy another firm, is so small that the income I obtain from profits or dividends enables me to return the money I have borrowed."

In the second stage, the moderation fades away. As the prices of their assets rise, investors call for more credit. Their income still covers the interest, but no longer allows them to repay the capital. The investor pays the interest, trusting they will be able to refinance their debt with new loans. This will be possible only as long as prices keep rising.

In the third and last stage, you get what is called "Ponzi financing" (a pyramid system that does not collapse as long as new investors keep entering: the old ones are paid with the money of the new, until...). Income is no longer sufficient either to cover the interest or to pay back the principal of the loan. Such financing is possible only as long as prices keep soaring, and investors can position their building or firm at a price notably higher than what they bought it at. Sooner or later, the pyramid system collapses.

This is what happened in the American mortgage system starting in 2007, and what has happened in Spain with many companies, which are now in the third stage. According to Minsky, modern capitalism, based on finance, is doomed to repeat time and again this pendulum movement, which drives it from conservative financing in the direction of "Ponzi financing," and vice-versa.

Economic policy must attempt to stabilize this inherent instability. In Spain this has not been achieved. Hence the extravagant GDP percentages that Spaniards owe, and the doubt that it will ever be possible to pay them without what the financial analysts call write-offs of "haircuts."