Is Spain Facing Japan-Style Stagnation?
Staff Writer, CNBC.com
The credit crisis has led to the U.S., the U.K. and even the entire euro zone being dubbed the "new Japan" – with the Asian country synonymous with a particular kind of extended stagnation.
Now, analysts at Deutsche Bank have examined the likenesses between Spain -- after its housing bust -- and Japan in the 1990s, and found some "very close" parallels.
(Read More: 'Japanization' of Euro Zone)
Japan dealt with its property-fuelled economic crisis of the 1990s via near zero percent interest rates and a massive transfer of debt from the private to the public sector. The resulting decades of deflation and shallow recessions have meant the country has become a byword for stagnation.
There are several key areas where today's Spain, which is reportedly mulling a full bailout by international creditors, is worryingly like Japan two decades ago. The first is the property bust which helped cause many of its problems.
Another is a high level of private sector leverage. As Dominic Konstam, analyst, and Francis Yared, strategist at Deutsche Bank point out, before the euro zone crisis began, the Spanish private sector was even more over-levered than the U.S. or Japan in the 1990s.
Spain's 10-year real rate (the rate investors receive on government bonds after allowing for inflation) is also "clearly too high," and "very close" to that observed in Japan during the 1990s, according to the Deutsche Bank team. This indicates that the country may have problems with its cost of borrowing in the long-term.
(Read More: Spain Facing Months in No Man's Land)
Yet Spain is not on an inexorable path towards turning Japanese, according to Konstam and Yared.
The Mediterranean country has deleveraged at a much faster pace than Japan did. And while the euro hasn't depreciated in value in the way some may have hoped, it hasn't increased in the export-harming way the yen did during Japan's crisis.
The European Central Bank(ECB)'s monetary policy easing, carried out via long-term refinancing operations (LTROs), has also helped, the two analysts added.
(Read More: What is an LTRO?)
And the most important tool in stopping Spain suffering Japan's fate could be yet to come.
The credit easing by the ECB earmarked for next year, which should bring Spanish bond yields under control, will ultimately be more important than its other actions, according to Deutsche Bank.
Written by Catherine Boyle, CNBC. Twitter: @cboylecnbc