Economic Situation in Spain Reaches Catastrophic Level

Spain’s third largest bank, Bankia, was declared fine just a month ago…

But, in mid-May, it was revealed that Bankia required a €4.1-billion government bailout. By the end of May, the government bailout required to help Bankia hit €23 billion (source: Telegraph, May 28, 2012).

Spain’s Orderly Bank is the country’s government bailout arm to manage all of the banks in Spain. It has only €5.3 billion allocated for government bailouts. So where does Spain get the money for the government bailout when the government has none?

Spain will have to try the debt market. Unfortunately, the debt market is well aware of Spain’s credit crisis and has sent interest rates that Spain now needs to pay on new debt back up to extremely high levels that the country can’t afford: 6.60% and climbing!

As I’ve written recently in these pages, Spain is experiencing its own version of a housing crash, on a larger scale. Property prices are estimated to drop at least another 20% due to staggering unemployment and the continued recession, further exacerbating the credit crisis, which is why a government bailout is a certainty.

The Centre for European Policy Studies in Brussels estimates that the Spanish banks would have to write off at least €270 billion in mortgage debt. There is no government bailout large enough to make up for this loss should it come to be!

It is critical to note, dear reader, that Spain’s two largest banks hold assets (debt and the country’s other loans on top of who knows what else) that are larger than Spain’s gross domestic product (source: Egan-Jones)!

What does this mean? It means the government of Spain has no money to provide a government bailout for the banks!

With the Spanish economy shrinking, unemployment at 24.4% and the housing market collapsing, the credit crisis worsens, because the banks’ “assets” are worth less and less with each passing day.

The people of Spain understand they are in a credit crisis and are moving their money out of Spanish banks and sending it to Germany or other northern European banks in order to protect themselves. What can be referred to as a “bank run” is occurring today, but on a small scale, at least for now.

This makes the situation for the Spanish banks even worse and ensures that the government bailout they are going to need will be large.

The situation has become so dire that this week the European Commission suggested a euro aid for troubled banks. Instead of funneling the money into the Spanish government, send it straight to the banks that need it instead, providing the government bailout the Spanish bank can’t.

However, Germany, Finland and the Netherlands are opposed to such direct government bailouts. So the stalemate continues, as Spain implodes. (See: A Problem Seven Times Bigger Than Greece.)

For the European Commission to suggest something like this means they know how dire the credit crisis has gotten in Spain. Something will have to be done soon, because if they allow even one bank to go bankrupt, the consequences will have global implications.

Financial institutions are connected worldwide. If banking institutions fail in Europe, it will have serious implications for the big banks here in the U.S.

Where the Market Stands; Where it’s Headed:

The official numbers are in: the Dow Jones Industrial Average lost 945 points in May, the equivalent of 7.1%.

What happens next?

More investors flock to the “security” of U.S. Treasuries, as they finally realize that the various recessions in Europe will affect the S&P 500 companies (40% of which have revenue streams in Europe), and China and the U.S. economy are slowing. The Fed gets ready for a third round of quantitative easing (QE3)…but it’s not enough to stop the bear market rally that started in March of 2009 from ending.

What He Said:

“If I had to pick one stock exchange that would rank as the best performer of 2007, it would be the TSX (Canada’s equivalent of the NYSE). Interest rates in Canada remain very low and they are not expected to rise anytime soon. Americans looking to diversify their portfolios, both as a hedge against the U.S. dollar and a play on gold bullion’s price rise, should consider the TSX. Most brokers in the U.S. can buy stock on this exchange.” Michael Lombardi in PROFIT CONFIDENTIAL, February 8, 2007. The TSX was one of the top-performing stock markets in 2007, up just under 20% for the year.