Healthy fiscal results during the boom masked huge problems in Spain’s real economy. Spain allowed its public finances to become reliant on an externally financed property bubble that also saw the country’s banks overextend themselves and its construction sector grow unsustainably large. When the bubble busted, it created a large hole in government revenues. In addition, there was a significant loss of competitiveness. In light of these substantial vulnerabilities, market sentiment is now rapidly turning against Spain and is being exacerbated by the backdrop of austerity, bank recapitalizations, private-sector deleveraging and economic recession.
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