The disaster that is Spain

 the disaster that is Spain. Give it a few more days. The bond markets are going to take another look at the figures coming out of Madrid and widen their eurozone field of fire. (Yesterday Spanish spreads on ten year bonds were already at 4.2 percent.)

So far, the only reason Spain has not had to follow Greece, Portugal and Ireland into handing over control of its finance ministry to Brussels-appointed eurocrats is because its level of public sector net debt, relative to GDP, is still below that of Germany and the euro area average. (Meanwhile by the end of this year, Italy will have the second highest level of public sector net debt, relative to GDP, in the eurozone.)

However, according to a report out yesterday from the economist Jamie Dannhauser at Lombard Street Research, Spain, relative to Italy, faces a much bigger task in reducing its fiscal deficit and placing the debt stock on a declining path: 

'Whereas the Italian budget should be in balance this year before interest payments are taking in account, the Spanish look like running a so-called "primary" deficit equal to around six percent of GDP. Official projections that it could get down to four and a half percent of GDP look wildly optimistic with Spain almost certainly back in recession.'

But here's what really sets Spain apart from Italy, and shows how dangerous Spanish investments now are: the vast scale of borrowing that took place within the private sector before the crisis and the consequent asset price boom.

And that's not just the Spanish property market bubble.

Tensions: Protesters wave their hands at the Puerta del Sol square in Madrid in October during a demonstration against corporate greed and government cutbacks

According to Dannhauser's report, 'Spain's corporate borrowing binge makes Japan's in the early 1990s look fairly tame. Its ration of household debt to disposable income, although below Ireland's and the UK's, is similar to that in the US.'

'The ratio is only 50 percent in Italy, compared with 130 percent in Spain.'

'The loss of income from the financial crisis and the persistently lower rate of growth in the future suggest the fundamental, or equilibrium, value of Spanish assets has been reduced significantly -- but the debt, largely provided by domestic banks, remains fixed in euro terms.'

But don't start thinking, 'this is private debt, not sovereign debt, it's not the same danger.' Wrong. The debt wonks among you may remember that it was Ireland's banks and the guarantee its (panicked, witless) government gave to bank debt in 2008 that drove Ireland into its disaster.