Proposed Bailout Money Not Enough: Credit Crisis in Spain Deteriorates


In two days this week, the Spanish stock market fell a staggering 12%. Why?

The Bank of Spain confirmed this week what everyone already knew: that gross domestic product (GDP) contracted at a 0.4% rate in the first quarter of 2012. And although the numbers are not available for the second quarter, we know the recession worsened from the first quarter. Estimates show that GDP contracted by 1.0% in the second quarter for Spain, with more austerity measures to come.

This contraction is forcing home prices to fall further in Spain. As I’ve been detailing, dear reader, the Spanish banks are saddled with mortgage debt. That debt continues to lose value, because home prices continue to fall, further exacerbating the credit crisis.

Home prices in Spain have fallen 30% since 2008, but they have fallen another 12.8% just in the first quarter of 2012!

Since GDP growth in Spain contracted by more in the second quarter, we can assume with certainty that home prices continued to fall, making debt at the Spanish banks worth that much less, inflaming the credit crisis.

This is why the 100 billion euros in bailout money for Spain is not going to be enough to cover the bad mortgage-backed securities. The market knows this, which is why the credit crisis has reignited.

To add to the problem, Spain’s regions—equivalent to states here in the U.S.—are asking for 15 billion euros in bailout money from the Bank of Spain, because they have run out of funds.

We complain here in the U.S. about the “fiscal cliff” at the end of the year, which will amount to three to four percent of GDP; but what about Spain, with almost 25% unemployment, a recession with contracting GDP, and austerity measures that will subtract another 10% from its economy? No wonder Spain’s credit crisis is front-and-center.

When investors saw this earlier this week, they sold Spanish bonds, which sent Spanish interest rates to record highs!

Investors understand that there is no way Spain can make good on its debts because tax revenue will continue to fall with the ongoing recession and austerity measures. Welcome to the next round of the credit crisis.

Certainly Europe, especially Germany, must make demands on Spain for the money they lend the country, but austerity measures to the degree Germany is asking are not livable for the people of Spain. The economy needs some kind of boost. Spain looks like it is guaranteed a depression right now; forget recession! (See: “Economic Situation in Spain Reaches Catastrophic Level.”)

The European credit crisis once again takes center stage. The European leaders must do something and soon or a Spanish bank will go bankrupt. My guess is more money printing is on the way. If they don’t print money and a Spanish bank goes bankrupt, dear reader, hold on tight, because all hell is going to break loose—and that’s why they will print!

Where the Market Stands; Where it’s Headed:

Yesterday marked the third day in a row the Dow Jones Industrial Average lost more than 100 points. Not a fun time to be an investor. But I will let you in on a little secret—it’s going to get much worse!

We are near the end of a bear market rally in stocks that started in March of 2009.

What He Said:

“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending, coupled with the drastic decline in the amount of their savings is a recipe for a financial catastrophe.” Michael Lombardi in Profit Confidential, September 7, 2005. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.