Time Running Out for Spain and the European Union

Talk of financial crisis is intensifying in the European Union, as interest rates in Spain and Italy remain at elevated levels and threaten to rise even further. This makes it almost impossible for both countries to go to the market to roll their debt over…unless it’s at impossibly high interest rates, which neither country can afford to pay.

The only reason interest rates have remained somewhat steady recently is that Mario Draghi, President of the European Central Bank (ECB), said the European Union was ready to stand behind Spain and Italy.

This means outright money printing or quantitative easing. But one big objection: Germany continues to insist that Draghi is overstepping his bounds in making such comments and that quantitative easing is not part of the ECB’s mandate and cannot be part of the European Union’s mandate unless all countries agree, including the European Union’s most important member, of course: Germany.

This coming September 12, the German Constitutional Court will rule on the 500-billion-euro European Stability Mechanism (ESM) the European Union is proposing. If Germany does not approve this package, the European Union will be finished, because Spain and Greece will simply run out of money. If Germany does approve the ESM, the European Union is stuck with the same problem: 500 billion euros is not enough to cover the obligations of Greece, Spain, and Italy. (Also see: “Proposed Bailout Money Not Enough: Credit Crisis in Spain Deteriorates.”)

A European Union official within Spain is saying—unofficially—that the country needs 300 billion euros in bailout funds! (Source: Reuters, July 29, 2012.)

What this will require is quantitative easing from the ECB. As unemployment in Spain reaches a record high of 24.6%, there are public calls from provincial government officials to leave the European Union. (Source: Telegraph, July 30, 2012.)

The head of Spain’s Freemarket Corporate Intelligence and a prominent economist within Spain, Lorenzo Bernaldo de Quiros, has written an article in Spain’s second-largest newspaper in which he states that Spain will be insolvent later this year. He says it is not an issue of “if it will happen” but “when it will happen.”

His argument is that Spain will need to restructure its debt, but if it does so under the European Union, it will face austerity and a continued decline in economic growth like Greece. He feels the best route is for Spain to restructure its debts and go about it alone, because then it can chart its own course and give itself the best chance to come out of this depression it is in.

One thing is for sure; the current path is unsustainable.

As I’ve been writing in these pages all along, dear reader, a bailout of 100 billion euros for Spain is not sufficient. Quantitative easing is the only thing that will keep the European Union together, at least temporarily, in the hopes that economic growth can resume relatively soon. Without quantitative easing, interest rates in both Spain and Italy will continue to rise dramatically, making the rollover of debt almost impossible.

Watch out for that U.S. stock market; if the European Union refuses to embark on a round of quantitative easing, it will cause a crisis that will send shockwaves around the world.

Where the Market Stands; Where it’s Headed:

We’re definitely not off to a good start for the stock market in August. The Dow Jones Industrial Average has been down four of the last four trading sessions.

That bear market rally that started in March of 2009; if the Federal Reserve doesn’t offer some more liquidity soon, it will be over.

(I’ll have a very important editorial on Monday. Looks like revenue growth for the S&P 500 companies is now at its lowest level since the credit crisis hit in 2008! Please watch for this important story Monday.)

What He Said:

“I’m getting very worried about the state of the U.S. housing market and its ramifications on the economy. The U.S. could be headed for its first outright annual decline in home prices on record, adjusted for inflation. And I really believe this could be a catastrophe for the U.S. economy.” Michael Lombardi in Profit Confidential, August 2, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.