The running of the bears: Why Spain could be next

Michael Babad

These are stories Report on Business is following Thursday, May 10, 2012. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

Spain’s troubles deepen
The political stalemate in Greece remains the focus of the euro crisis today, but don’t lose sight of Spain.

Spanish bond yields have been climbing, and its jobless rate, at almost one-quarter of the work force, is the worst among Europe’s major economies. The government has also been forced yet again to try to fix its hobbled banking system, seizing control of Bankia, the fourth-largest lender in the country.

A bailout for Spain, of course, would take the euro crisis to an entirely new level, which is what markets have feared.

“Europe continues to keep investors on the back foot today with Spain now vying with Greece in keeping markets nervous,” said senior analyst Michael Hewson of CMC Markets in London.

“In Madrid fears about Spain’s banks were manifested in a sharp rise in Spanish bond yields to dangerous levels yesterday, which reflect market concern about the solvency of the Spanish banking system,” he added. “In an attempt to restore confidence the Spanish government last night took a 45-per-cent stake in Bankia, by way of its bank bailout fund.”

The situation in Spain looks bleak on its own, but its troubles really come into focus when compared to Germany, as research by Sal Guatieri of BMO Nesbitt Burns shows.

“News of rising bank loan losses in Spain, alongside the usual chaos in Greece, drove Germany’s 10-year borrowing costs to a record-low 1.5 per cent,” Mr. Guatieri said.

“Lower rates beget lower unemployment, with the current rate already at a two-decade trough of 5.6 per cent. By contrast, Spain’s yields jumped to 6 per cent up one percentage point since early March, which means its jobless rate, already sky-high at 24.1 per cent, hasn’t peaked. The divergent situation is untenable in a monetary union.”

(For Mr. Guatieri’s research, see the accompanying infographic or click here.)

Spain’s problems aren’t quite the same as those in Greece, with the banking sector in the crosshairs, though its books are a mess. And many still see a default in the works, though a costly rescue would be the more likely scenario. Any way you cut it, Spain spells more trouble for the 17-member euro monetary union.

“Spain has a significant fiscal problem, with a forecasted fiscal deficit of 6 per cent of GDP this year (IMF); however in relative terms they do not have a debt problem, boasting a gross debt of 79 per cent of GDP,” said senior currency strategist Camilla Sutton of Scotia Capital.

“The biggest problems (and we admit these are serious) are the large exposures the banking sector has to real estate, a lack of growth, unemployment, and increasingly important is dwindling investor confidence … A crisis of confidence could well become Spain’s (and the EMU’s) biggest problem.”

In Athens, the political stalemate after Sunday’s elections continued, making a second vote likely in June. And, for her part, Angela Merkel held firm in demanding austerity measures not take a back seat.

Markets troubled, but rising
Against this backdrop, global markets are on edge this morning, although have turned around from earlier losses. Also playing into the mood were weaker than expected trade numbers from China.

“The part-nationalization of Bankia by the Spanish government seems to be welcomed as at least an attempt to try and draw a line under any further potential for a banking crisis here,” said David Jones, chief market strategist at IG Index in London.

“And a last ditch attempt to form a government in Greece by the Socialists has investors crossing their fingers but probably holding out little hope.”

Tokyo’s Nikkei slipped 0.4 per cent, and Hong Kong’s Hang Seng 0.5 per cent. But in Europe, Lodon’s FTSE 100, Germany’s DAX and the Paris CAC 40 were up by 0.2 per cent and 0.9 per cent by about 8:45 a.m. ET.

Dow Jones industrial average (YM-FT12,844.0049.000.38%) and S&P 500 (ES-FT1,360.759.750.72%) futures also climbed.

“Spanish 10-year bond yields are back below the 6-per-cent mark, but barely,” said senior economist Jennifer Lee of BMO Nesbitt Burns.

“There were quite a number of economic indicators that were released this morning and overnight but they didn’t seem to provide too much direction as there was good news and bad news sprinkled throughout. But news that China’s import growth slowed sharply … doesn’t sit well (nor should it) and hints for more stimulus efforts from the government, more than just cutting fuel taxes 3 per cent.”


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