Spain becomes eurozone's weaker link

People queuing at a job centre in Madrid

The implicit interest rate that investors charge for lending to Spain for ten years - what's known as the yield on the benchmark ten-year bonds - has in the past 24 hours exceeded what they demand of Italy, and is now more or less the same.

Or to put it another way, investors are now a little more anxious about lending to Spain than to Italy.

Another way of seeing this is that yesterday, when Spain actually borrowed €3.6bn of new ten-year loans, it had to pay 6.975%, the highest rate for 15 years and so close to the unaffordable 7% rate as makes no helpful difference.

In short, as Spain prepares for its general election on Sunday, it has become the weaker link in the eurozone chain.

New fundamental research by the consultancy McKinsey sheds some light on why that should be.

The point is that if you add together all debts - government debts, corporate debts, financial institution debts, and household debts - Spain is a much more indebted or leveraged country than Italy.

It is relevant to add those debts together for two reasons. Broadly the same group of global investors lend to governments, banks and businesses, so if they become worried about a country's economic prospects they become wary of lending to any of its economic actors. And secondly, the burden of paying debts suppresses economic activity, whether the debtor is a household, a government, or a company.

So here are the numbers - and for Spain they are hair-raising.

In 1989, Spain's ratio of government debt to GDP - the value of what the country produces - was just 39%. Its ratio of corporate debt to GDP was 49%, the ratio of household debt to GDP was just 31% and financial sector debt was just 14% of GDP. The aggregate ratio of debt to GDP was 133%.

By the middle of this year, the picture was utterly different. The aggregate ratio of debt to GDP had soared to 363% of GDP.

And it was really from 2000 onwards, the euro years, that Spain really got the borrowing bug, with the ratio of aggregate debt to GDP rising by a staggering 171 percentage points of GDP.

The biggest increment over the past 20 odd years has been in the ratio of corporate debts to GDP, which has soared to a staggering 134% of GDP. Spanish companies have become addicted to debt.

You may have some inkling of what's been going on here from, for example, the massive debts that the Spanish business Ferrovial took on when buying the UK's airports group, BAA.

Ferrovial borrowed heavily to buy BAA

In general Spanish businesses geared up, or took on huge amounts of additional debt, especially those in the property and utility sectors.

Meanwhile the indebtedness of households rose to 82% of GDP, government debt increased to 71% of GDP and financial debt - which is bank lending to financial vehicles that aren't banks - went up to 76% of GDP.

Individually, none of those debt ratios are alarmingly high. But it is the fact that they are all relatively high that poses a problem for Spain.

Now the numbers for Italy - also furnished to me by McKinsey - are for the end of 2010 rather than for mid 2011. But the change since then hasn't been dramatic so they are useful for comparison.

Here's the thing. Italy's government debts, at around 120% of GDP, are a far bigger burden than Spain's.

And the debts of its financial sector are more or less the same: which may be another way of explaining why creditors' confidence in both Italian and Spanish banks has been seeping away in recent weeks and months.

But the debts of Italy's private sector are a fraction of Spain's. The indebtedness of Italian businesses is just 81% of GDP and the indebtedness of households just 45% of GDP. Italy's private sector, from the point of view of indebtedness, is in pretty good shape.

So Italy's total indebtedness at the end of last year was 313%, some 50 percentage points less than Spain's.

The point is that a government's ability to service and repay debts depends partly on the overall size of the debts, and partly on the health of the private sector that pays taxes.

A private sector relatively burdened by huge debts - as is the case in Spain but not Italy - is less able to spend and invest. As a result, it struggles to provide the momentum in the economy necessary for the generation of growing tax revenues.

So if investors are finding it tricky to decide whether Spain or Italy currently represents the bigger credit risk, we shouldn't really be terribly surprised.