In 2006 the external net borrowing requirement of the Spanish economy was almost 8% of GDP, after having been in balance between 1993 and 1998. This increased borrowing requirement is the financial mirror image of a growth model, in which corporate and households' investments are generating an unprecedented private demand for credit. Although the solvency of Spanish borrowers does not seem to be at risk in the short term, in the medium and long run, any widening of the already extensive recourse to external saving might lead to additional pressure on the economy.
An assessment of external imbalances should include scrutiny not only of the existing financial instruments and who issued them, but also of cumulated debt levels, i.e. an analysis of flows and stocks. According to the findings of this country focus, it is portfolio investment, rather than FDI, which is the main financial instrument, while the financial system - and not the corporate sector or general government - has become the main channel between domestic borrowers and private foreign lenders.
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