Spain Is the Pain

NEW YORK (TheStreet) -- If there was a doubt about it, there isn't any more. The European debt crisis is not simply a Greek phenomenon. Spain is the focus now. Spain (sovereign and private) owes foreign investors roughly $1.1 trillion. In comparison, Greece's external debt is closer to $236 billion.

Besides the news that everyone is now aware of (a savings bank taken over by the central bank over the weekend, the merger of four additional banks and the IMF's warnings), two other developments are noteworthy.

First the good news. Spain reported today that its central government deficit in the first four months of the year narrowed to €5.66 billion from €6.91 billion in the same year-ago period. This is about an 18% improvement. Recall that just last week, Spain announced additional cost cutting, including a 5% reduction of civil servant salaries and a freeze on pensions. Note that it does not include the social security system or local governments.

That is a good segue to the second and not so good news. Yesterday Spain seemed to indicate that it was banning local governments from taking on any more long-term debt. The local papers today are clarifying this to mean that the ban will come into effect on Jan. 1, 2011 and last a full year. Local governments last year accounted for nearly 0.55 percentage points of the 11.2% deficit.

This is a timely reminder of the importance of local governments in Europe and their borrowing. In some countries, including Italy and Germany, the borrowings can be substantial.

The point in Spain however is that if local governments can't make long-term borrowings next year, wouldn't that increase the incentives to borrow (if they can) this year?

Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.