First Major Eurozone Company to Fail This Year

The victim toll of the European Union’s recession is beginning to mount…

Spanair, Spain’s fourth largest airline, filed for voluntary bankruptcy on Monday. Unfortunately, I predict this will be the first of many victims to come, as the recession in the European Union takes hold.

The Barcelona-based firm stopped operating as of last Friday, canceling 200 flights and stranding thousands of passengers across the European Union.

Spanair, a key Spanish carrier that began operations in 1986, pinned its hopes on a merger with Qatar Airlines, but unfortunately talks fell through. Since 2009, as it continued to struggle with the weak economy, the regional government of Catalonia provided 150 million to the airline to help it get through difficult times.

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The problem is, those difficult times never subsided, bur rather intensified. After talks with Qatar failed, the airline returned to the government of Catalonia for another undisclosed sum of money. The government refused, due to the severe budget cuts it needed to implement for the austerity measures imposed on it by the European Union.

With losses mounting and with debt of over 300 million, the airline felt it had run out of options and time, with bankruptcy being the only solution.

Spanair is a regional carrier that specialized in short-haul flights within Spain, and on medium-haul routes to parts of the European Union and North Africa. There is no question that the airline faced competition from low-cost carriers Ryanair and Easyjet. However, the recession in Spain reduced air travel significantly, which hurt the carrier’s bottom line.

Not only are Spanair’s 2,400 employees out of a job, but it is estimated that, through contractors, an additional 1,600 people could be affected. This is compounded by the fact that the unemployment rate in Spain stands at a staggering 23.3%, with that economy showing no signs of turning the corner, as austerity measures continue to hamper growth.

The regional government of Catalonia not only spent 150 million in taxpayer money to keep the airline afloat, but it also owns 24% of the airline, which means that it further stands to lose an estimated 349 million.

This, dear reader, could be a harbinger of things to come in the European Union and throughout the world. Companies in distress seek government aid to help them through tough economic times. There are no funds left to bail out these companies, especially when austerity measures enacted by the European Union need to be adhered to.

With the recession firmly in place in the European Union, and growth outside the European Union difficult to find, this leaves many firms with no choice but to declare bankruptcy.

As the strain in the European Union intensifies, this will affect growth here in the U.S. Welcome to 2012. Fasten your seatbelt tight, dear reader; the forecast calls for turbulent times ahead. (Also see: Half of the Eurozone Downgraded: Time to Start Worrying.)

Where the Market Stands; Where it’s Headed:

The numbers are in: the Dow Jones Industrial Average was up 3.4% for January—its best January in about 10 years. This is good and bad. It’s good if you believe in the January effect theory, which states that, if January is up, the remainder of the year is up (I don’t give much credit to the theory). The January rally is “bad” because, despite the Fed saying it will keep interest rates down until late 2014 and despite the government asking to increase the national debt by $1.0 trillion more (which means more spending), we really didn’t get much response from the stock market.

A bear market rally in stocks was born on March 9, 2009. That rally has lasted 34 months. It is common for such rallies to last three to four years. However, this rally is getting very old, very tired.

What He Said:

“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi in PROFIT CONFIDENTIAL, April 8, 2004. Michael first started warning about the negative repercussions of then Fed Governor Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.