Although Greece has taken the center stage in the EU debt drama, Spain's debt has grown from 36% to 66% of GDP in the last two years. This matters especially because Spain has the 9th largest economy in the world, which means it is larger than Australia's, Canada's or even Brazil's. The sudden growth in debt is thanks to a budget deficit of 11.2 per cent this year, which is expected to still be around 10.2 per cent next year. While Spain's proportion of public debt to GDP is only about half the level of Greece, unemployment is much worse and the economy faces severe problems of competitiveness as well as high levels of public debt. The unemployment level in Spain is heading for 20 per cent in 2010 with a staggering 43 per cent of people under the age of twenty five out of work. Standard & Poor's, which cut its rating on Spanish debt to AA+ from AAA early last year, reduced Spain's debt outlook to negative in December 2009.

Default insurance surged 16 basis points after Nobel economist Paul Krugman said that "the biggest trouble spot isn't Greece, its Spain". He blamed EMU's one-size-fits-all monetary system, which has left the country with no defense against an adverse shock.

Spain has gone on the offensive targeting massive budget cuts as a means of bringing itself back in line with euro zone debt requirements. This includes cuts to social security, foreign aid, and a hiring freeze on the civil service. It is the latest attempt by the troubled state to dodge a crisis like Greece is in. The Spanish government has decided the best way to fight the crisis is with a combination of massive spending cuts and tax increases in what some are calling an "austerity budget." They are even going so far as to raise the retirement age from 65 to 67. The government is doing everything it can to meet its budget requirement for 2013, which includes knocking back its deficit from 11.4% of GDP in 2009 to 3% of GDP by 2013.

Paying for power
Spain's government will guarantee up to €10 billion in debt issued by power companies this year to cover the gap between the price Spanish consumers pay for electricity and the cost of producing it. The government will also give a guarantee for debt related to that difference for the entire period from 2009 to 2012, the Industry Ministry said in a release. The accumulated tariff deficit, from previous years up to now, adds up to €16 billion, the government said. The government also said that Spanish power companies will have to pay for the management and storage of nuclear waste themselves, which so far adds up to €2.7 billion.

The difference between the cost to the utilities of generating electricity and the income from selling it on the regulated market has ballooned in the past year due to increasing energy costs. Endesa (ELE.MC) is owed about 4.4 billion euros of accumulated tariff deficit, while Iberdrola (IBE.MC) has 3.3 billion due to it and Union Fenosa's UNF.MC figure is about 1.9 billion. The deficit appears on the companies' balance sheets as receivables until the amounts are securitized, putting pressure on liquidity since they form a long-term debt. Aside from a massive and unpopular hike in customers' electricity bills, the government could lower the deficit by increasing its CO2 clawback tax or reducing the premiums paid to renewable energy to lower the deficit, analysts said. The government has said it expects power companies to give ground in upcoming talks on deficit reduction.

House of Cards
Spanish real estate and construction firms are suffering a significant correction in their stock prices. This has sparked questions about the health of the sector, and alarmed investors and families that have mortgages to pay off. According to some organizations, people's homes could be overvalued by as much as 30%. The construction sector has been one of the country's motors of growth, so its cooling down could also affect the GDP. Construction and real estate firms hold over a quarter of debt in Spain and represent over a quarter of all suspended debt payments, according to Bank of Spain and government data. Many Spanish property firms are struggling to sell assets to pay down debt accumulated in Spain's decade-long housing boom. Spanish property firms have suffered falls of over 30 percent in house sales this year as the real estate sector seizes up in a global financial liquidity squeeze.

Will the spending cuts and possible tax hikes save Spain and the EU, only time will tell.