Why You Need to Pay Attention to Spain’s Situation

The downgrade of Spain’s credit rating by Fitch last week is worrisome and clearly needs to be considered by traders here. Europe may be an ocean away, but the close connectivity of the global economies makes impacts overseas felt by markets around the world.
Europe is a vital market for U.S.-made goods and services. We need to see economic stability in Europe, which is critical to the global recovery, as there are over 500 million people. The 27-member European Union (EU) reported a Gross Domestic Product of $16.45 trillion in 2009, larger than the $14.26 trillion of the U.S., according to the International Monetary Fund. This is significant. The reality is that the downgrade of Spain, while not a major concern at this time,
should still not be overlooked. Economic and debt failure in Spain would be far worse than what we saw in Greece given that Spain’s nominal GDP in 2009 was $1.46 trillion or ninth in the world. Compare this to the much smaller $330.78 billion nominal GDP in Greece, which is 29th.The euro currency used by the 12 countries in the eurozone has been sinking against the greenback and is at a fresh four-year low. This is not good. It means that U.S.-made goods and services become more expensive to consumers in the eurozone and this could impact export growth for U.S. goods and services. The decline in the euro suggests growth weakness in Europe. Expectations call for stagnant growth in the EU in 2010 and 2011, slower than the U.S. and other industrialized regions. I also fear that the trillion-dollar financial bailout package in Europe could impact forward growth in the region and this is not good.In a report, the Organization for Economic Cooperation and Development (OECD) predicted that the world’s rich economies will slow in the first half of 2010, but expects growth in the U.S. and Japan to exceed that of Europe.Slowing in Europe will also impact China, as the two regions have become major trading partners similar to that of the U.S. and China. A report on Tuesday showed that manufacturing slowed in China in May. The concern is that the situation in Europe could slow down growth and this could impact China, which has heavy exposure to Europe.As we move forward, watch the markets to see if they can hold. The key will be some stability in Europe and the avoidance of an asset bubble and/or increased slowing in China. The situation in Europe will likely continue to be an overhang on trading here.