Spanish economic and monetary problems reside in their banking sector. Their government finances look OK to me, certainly better than the UK. Going forward this may not last as tax evasion is as popular as football in Spain. But the Spanish banks must have around 200bn€ of bad property loans on their books. The repossessed properties the banks hold as a result are very difficult to sell because of the problem of establishing proper title and dubious planning legality of many of these houses.
Ex-pats have been badly burned in Spain because of corruption in the planning system sanctioning many thousands of illegal houses. So ex-pats are largely out of the property market. With unemployment at 25% domestic demand is also in decline. There are so many small Spanish banks, cajas, that I doubt the Spanish Central bank has any accurate assessment of the scale of the problem.
Worse,the Eurocrats are prattling on about creditors must share the burden, debt restructuring which is Eurobabble for a debt default etc. The market wont be fooled for one second. They know a default when they see one. The Eurocrats like it as it is politically sellable, well in the short term anyway, and involves no loss of face or mea culpa for Barroso again in the short term. Its a typical short term politically expedient solution that will start to unravel the moment its announced!
Just look at it from a common sense personal view. Are you going to lend more money to someone who has just reneged on their previous debt to you? Its as simple as that. When the first default is announced in the public or private sector of PIG land funds will dry up for banks and governments. The ECB will then be the lender of last resort. Euro money supply will rocket and with it inflation. Add that to increasing unemployment and its to the barricades comrades and lets lynch a few politicians en route.
Oh to be in Euroland now that Spring is there.