Here comes the European version of a financial H1N1: (link requires WSJ subscription).

This may only be the start. There are a few more letters in the term “PIIGS” … It is interesting that it hits Spain first; after all, this is the one country among the PIIGS that has the least of the debt problems. This is a nice way of highlighting that country risk, R = R[debt/GDP], is is a function of both debt and income. So as Spain’s income tanked, its risk rose although its debt accumulation may not have accelerated…

Source: WSJ

Given the definition of Risk above, use the Mundell Fleming model with fixed exchange rates to identify the effects of a contraction (assume government expenditures declined) in Spain. Note that not only the IS but also the BP=0 line must shift when R =R[debt/GDP].