Spain's problems

Spain has had one of the highest rates of homeownership in the world. By 2002, 84% of Spaniards owned homes, assisted by steady employment, improved wages and government efforts including a mortgage-interest tax deduction and elimination of rent controls.

Spain and Ireland joined the European Community, the forerunner of the European Union, in 1986, leading to the removal of regulatory and trade barriers and, later, the adoption of a common currency. "Because of the integration, credit was available at a much lower rate," Hoek-Smit says. "Everyone had the same currency, there were no more boundaries financially, no more foreign-currency risk."

But there was a penalty: After Spain and Ireland relinquished control of their monetary policies, they lost the ability to control growth by raising interest rates.

In Spain, legions of sun-seeking Northern Europeans scooped up second homes and retirement retreats. Home prices shot up by 10% to 15% each year for seven or eight years.

Between 2000 and 2006, the average home price grew to 13 times the average worker's salary, according to Spanish real-estate writer Borja Mateo. Imagine a worker earning $60,000 buying a $780,000 home.

Most Spanish mortgages are cheap, adjustable-rate products, says Lea, of San Diego State University. Banks refrained from peddling the risky subprime loans that many American lenders sold. But when Spain's bubble burst, that didn't matter: Nearly a quarter of Spaniards -- and about half of young people -- are jobless now, sending formerly solid borrowers into default.

Spanish real estate, hugely overbuilt, has lost 27% of its value, similar to the average drop in the U.S. nationwide. Experts predict that, unlike U.S. prices, prices in Spain have much further to fall. Spanish banks are getting a 100 billion euro ($121.6 billion) bailout from the European Union. Lea predicts the tumble in Spanish real-estate prices eventually will resemble the some of the biggest plunges in parts of the U.S. -- in Florida (43%), California (44%), Arizona (46%) and Nevada (58%).

Trouble in Ireland

Ireland's bubble, too, was fed by cheap credit, easy lending and overbuilding.

A key difference was scale. The country is small, with just 4.7 million people, yet its banks took on more debt, proportionately, than anywhere else, except maybe Spain. "It was mostly on the construction side . . . enormously irresponsible loans to developers who got stuck with developments they could not sell," says Hoek-Smit.

Home prices grew unaffordable, even with low interest rates and wages rising so high that Irish industry became uncompetitive. "That bubble had to burst, and when it did, it took down the banking system," Lea says.

The government's bank rescue added greatly to the problem, he adds. Ireland guaranteed all bank liabilities, nationalizing two of its three largest banks. Ireland's 64 billion euro ($77.8 billion) bailout was "perhaps a number they could not afford in any stretch of the imagination," says Lea. "Because Ireland was so overbuilt, it'll be many years before you see the property sector contributing to the economy again."

The U.S. bailed out its banks, too, but unlike in Ireland, the American bailout had limits. And U.S. megabanks, at least, have repaid most of the $245 billion they got from the federal government.

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The global situation

The fragility created by these bubbles continues to haunt economies around the world. Each country is trying, at its own pace, to contain and absorb losses. But "we are still in the middle of it," Hoek-Smit says. "There are incremental improvements, but it is still dangerous."