Spain’s current economic pain nothing new

It practically invented the term “sovereign” debt crisis

January 5, 2013

CALGARY, AB, Jan. 5, 2013/ Troy Media/ – Lately, Spain has been considered one of the European Union’s problem children. Along with Ireland, Portugal, Greece and Italy, the countries have been referred to collectively as the ‘PIIGS’ nations, a none-too-flattering acronym. The 2008 financial crisis has led to rumours and predictions of one or more of the PIIGS countries going bankrupt. But for Spain, the spectre of a potential national bankruptcy and a sovereign debt crisis is nothing new. They have been here before, numerous times.

It is worth remembering that Spain was once a global empire, and that during that 16th and 17th centuries, ‘Golden Age’ Spain had access to dazzling amounts of New World gold and silver. That this wealth came at the expense of two major New World empires, the Aztec and the Inca, is what we would perhaps refer to today as collateral damage.

The Spanish Golden Age boom led inevitably to a bust, as this new-found Spanish wealth actually led to inflation of prices of everyday items. In a type of informal European trade union, Spain needed to import most everyday items from their European neighbours. But what really caused the 16th century Spanish financial crisis was one four-letter word: debt. In fact, the Spanish Hapsburg monarchs practically invented the term ‘sovereign’ debt crisis.

By 1516, Ferdinand, of Ferdinand and Isabella fame, died, and ultimately his grandson, Charles I (1516-1556), from the Austrian royal house of Hapsburg took over both Spanish kingdoms of Castile and Aragon. Charles was keen to add the title of Holy Roman Emperor to his regal portfolio and, to aid this campaign, he took out a huge loan of 850,000 florins to bribe the Electors. The lenders of this loan were the Fuggers, a merchant banking family from Augsburg, which just happened to be in Germany. The idea was that gold and silver from the New World would pay for the loan. Unfortunately, Charles just kept right on borrowing. Estimates were that he owed a staggering 37 million ducats by 1556, the year he abdicated his throne in favour of his son and retired to a monastery in Spain.

Charles’ successor and son, Phillip II (1556-1598), immediately defaulted on the Fugger loan, effectively bankrupting the country. But Phillip was actually just changing bankers, and had no plans to stop borrowing. He simply moved to Genoese bankers, who happily indulged him even further. Phillip actually defaulted on his loans with his bankers three more times during his reign, in 1560, 1575, and 1596. His last default in 1596 was precipitated by the disastrous defeat of the mighty Spanish Armada by the British under Queen Elizabeth I in 1588.

You would think that his son, the aptly named Phillip III (1598-1621), would have learned a lesson or two about debt from his father’s poor example. Perhaps he did, but it was the wrong lesson, as he too defaulted on his debts in 1607. Not to be outdone and to continue what had now become a Hapsburg family tradition, Phillip IV (1621-1665) also went bankrupt in 1627, in 1647 and 1653. It was only the final Hapsburg king, Charles II (1665-1700), said to be the least capable, who avoided bankruptcy during his 35-year reign. After this, the French royal house of Bourbon took over the Spanish throne, and yes, you guessed it, Spain went bankrupt again in 1739 under Phillip V.

In total, Spain has suffered 13 bankruptcies in the four centuries between 1500 and 1900. Their current predicament is therefore nothing new. Financed by exuberant foreign bankers, encumbered by huge debt, and trying to dominate a dysfunctional Europe, Spain was an overextended empire that eventually squandered great wealth.

There are definite echoes of the past that have come down from this time to modern-day Spain. The 1990s and early 2000s were another Golden Age of renewal in Spain, with major infrastructure projects initiated and paid for by virtue of their entrance into the European Union in 1986. A real estate boom brought the ‘wealth effect’ to ordinary citizens, with more than 80 per cent of Spanish citizens owning their homes. After the credit bubble burst in 2008, the country has spent the past four years trying to deal with its latest sovereign debt crisis and fend off bankruptcy.

For 21st-century Spain, it’s fair to say that this is simply dejà vu all over again.

Troy Media columnist Lee Tunstall has a PhD in History from the University of Cambridge. She is an Adjunct Assistant Professor in the Faculty of Arts at the University of Calgary in Alberta.

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