The Spanish economy is currently trapped in the heavy shackles of debt, leading to harsh spending cuts and perhaps intolerable levels of financial hardship among the people. This became more evident when Standard and Poors (S&P) downgraded Spain’s rating by two notches.

Spain’s rating was downgraded from an A to a BBB+. This is the second time the rating was lowered within a year, leading to widespread fear and uncertainty over Spain’s fiscal conditions. Unfortunately, this is just part of an overload of bad news for Spain, along with unemployment reaching a record high of 24.4 percent and confirmation from the central bank that Spain is in recession for the second time in three years.

Debt and budgetary problems appear sovereign, but others should not be impacted even by its sheer scale. The problem is the movement of capital between nations, leading to the vicious cycle of debt. When fiscal imbalances erupted in Greece a few years back, they seemed to have transmitted unequivocally, like a deadly virus. After Greece’s announcement, another debt bomb exploded in Italy, again in Spain, and again in Portugal. Greece was the first of  multiple incidences of crisis.

Countries in debt struggle with a clash of recession and fiscal inefficiency in terms of debt management. One smooth way to get rid of debt is to increase tax rates so that the state can repay it and reduce interest burden. But a tax rate increase requires sound and consistent growth rate, which can rarely be found in the short-term.

Another major problem associated with public debt is a rise in the cost of borrowing in domestic as well as international markets, leading to complications in finding sources to repay it. In Spain, the economy contracted by o.3 percent in the last quarter of 2011. Bringing back a growth rate that can complement a rise in tax rates is a distant dream in the short term. On an annual basis, GDP slipped by 0.4 percent.

Debt problems have both micro and macroeconomic implications. At the microeconomic level, the households feel the heat of debt in terms of a rise in cost of living and a rise in interest rate in the initial stages of a problem.

At the macroeconomic level, public debt seems to grow if the ratio of debt to GDP is bigger. According to Global Finance magazine, Spanish Debt-GDP ratio was 56 percent in 2009. In 2012, the  ratio stood at 79.8 percent, a troublesome turnaround.

Out of the 100 percent of what a country produces, it is required to pay almost 80 percent to creditors, even at a time when the economy is struggling to get back to normalcy. If, somehow, a country reduces its debt load, then stiffer austerity measures are hardly necessary.

Smooth functioning of the economy acts as a cushion while fighting with debt. Because debt and growth in GDP are inversely related, when the GDP growth rate is higher debt can easily be warded off. But when the debt component is greater than GDP rate, the country faces crisis.

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Soon after the so-called end of the depression period in the global economy, at a time when the global economy started a weak recovery, a more complex economic phenomenon emerged as the next bellwether to world economy.

Since 2009, the European economy has been struggling with slow economic growth rate and indomitable debt crisis that led to political disturbance in some countries of Europe. The crisis has dragged these economics back in to recession.

Years of heavy, unprecedented government spending in Greece and other countries of the Euro zone, led governments to go beyond available budgetary resources, and rely solely on borrowing to finance expenditures. This produced a series of risks to these economies and financial systems as a whole.

Leading economists warned that European debt crisis could spread across the continent in a major blow to the single currency system; further, the International Monetary Fund said turmoil in Greece, Ireland and Portugal may engulf the wider Euro zone despite billions of Euros already spent in emergency aid so far.

In an attempt to reduce dangerously rising levels of debt and forced and deep painful cuts in public expenditure — less government spending — drove up unemployment and put several nations back into recession. Many economists around the world claim that such immediate spending cuts are self-defeating in nature.

After much struggle in 2010 the EU and IMF combined to offer Greece a bailout package of 110 Billion Euros, followed by a broader contingency fund of 500 billion Euros. But the new loans came with the effect of austerity measures that apparently demanded a ceiling on public expenditure leading to widespread protests and political uncertainty in Ireland and Portugal.

Recently, the prime minister of Portugal said the government decided to ask the European Commission for financial help. According to economists, Portugal needs financial aid to the size of 80 Billion Euros.

After Greece and Ireland, Portugal became the third financially troubled country in the Euro zone to request financial assistance from Europe’s Bailout Fund and the IMF.

The era of financial trauma in the Euro zone began in December 2009, after newly elected Greek Prime Minister George Papandreou announced that his predecessors had hidden the actual size of the massive budget deficit. In a bid to regain the lost confidence in the region, the IMF urged European leaders to fix the banking problems and slash national deficits that have undoubtly led to stringent austerity measures.

Economists also say that strong policy responses so far that led to the weakening of Greek, Irish and Portuguese economies have contained the fear to some degree. However, markets are uncertain about the Greece capacity to pay back its debt of 285 million pounds, or $463.95.

As of now, Greece has more than 300 billion Euros of debt constituting to a sum of 140 percent of its total GDP. Recently, the EU and IMF Agreed to a 110 billion Euro bailout. According to Jose Manuel of the European Central Bank, a default would have extreme adverse consequences for the Greek economy.

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