Spain's current account deficit improves

While the US state of California is handing out a $3 billion in i owe yous to contractors and welfare recipients to compensate for its huge budgetary problems - a $24.3 billion deficit, to be precise - one European nation has managed to turn its finances around.

Before the credit crunch set in, Spain had a the world's second largest current account deficit. But the global recession has prompted a down-turn in the need for foreign goods which economists say had helped push its current account deficit to ten per cent of gross domestic product in 2007.

The lack of easily available credit makes relying on foreign imports a near impossibility and it may have saved Spain in many respects; before the landscape shifted despite a population of 45 million the nation's debt was second in nominal terms only to the US, reports the Guardian.

With the change in the financial climate, the deficit shrunk from 9.14 billion euros in April 2008 to 3.49 billion euros in the some month this year.

As a result, Spain's economy should now contract slower than it would have with the larger current account deficit, although it is still expected to shrink at a rate of four per cent in 2009.

However, that is not to say that the country will not struggle in the future. Its past economic growth has largely been based on a boom in the construction industry and Spanish banks have been selling bonds to foreign lenders on a vast scale. The capital earned on these pursuits was lent to Spaniards by the banks, enabling them to buy homes - a cycle perhaps no longer sustainable.

Meanwhile, the Ukraine's current account deficit also shrank in the first five months of 2009, again, according to the nation's banks, thanks to a decline in foreign trade.

Earlier this year, This is Money posed the question does the UK's current account deficit matter, or is it another complex financial structure beyond the understanding of the domestic consumer market?

The publication said: "It sure does.

"One of the underlying causes of the credit crunch (as the Bank for International Settlements noted) is the global imbalances.

"Certain countries, notably the UK and the US, have been living well beyond their means."