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Spain and The Runaway Euro Bailout Train

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By EconMatters

Spain finally bowed to the rising interest rates and the billions of euros worth of bad loans at Spain's regional governments to ask for a loan.  After emergency talks between Euro Zone finance ministers on Saturday, Spain will get up to $125 billion from the European Union (EU) to bail out out its banking system. 

 

The move came three weeks after Bankia, the nation's fourth largest bank, asked the government for a $24 billion bailout.  Spain's economy and financial system are still reeling from the collapse of a massive real estate bubble (house prices have dropped by 25% since 2008) and the subsequent Great Recession.  Bank bad loans as a percentage of total lending jumped to 8.4% in March, the highest since August 1994, and a majority of Spain's financial institutions are saddled with debts much greater than their assets.

 

 

 

The $125-billion aid sought by Spain is about 270% of the amount estimated by an IMF study released June 8, but close to the $126 billion projected by a report from Fitch Ratings released on Friday.  The aid money will come from two funds - the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM).

 

This bailout may give investors and markets some calming effect, but will not resolve the fundamental debt, deficit and economic problems of Spain. Spain has the highest unemployment rate in the EU at 24.3% (its youth unemployment is at a staggering 51.5%), even worse than Greece,  whole GDP is set to shrink 1.8% this year, according to IMF estimates.  So the odds are very good that Spain may need more bailout down the road.

 

Spain marks the fourth bailout during this Euro Zone debt crisis saga, after Ireland, Portugal and Greece, and may need more aid money, while Italy is looking good to be the fifth bailout candidate.

 

According to BusinessWeek, the bank bailout could add up to 10 percentage points to Spain's debt ratio, which should peak at about 100% of GDP in 2015. But that's still a lot less than Italy, whose debt is over 120% of GDP.  Although Italy runs a lower deficit to GDP ratio than Spain, Italy is also facing soaring borrowing costs, and relying on ECB for funds (See 2 Charts Below).

 

 

 

 

 

Even with the Spain bailout, there are still many moving parts in this euro debt crisis.  Greece might choose to exit of the Euro depending the outcome of the election on June 17, which could have catastrophic contagion effect on global markets.  And if you take a look at Euro Zone debt to GDP numbers, there's a good chance the sovereign debt crisis probably would not stop at Italy either.

 

 

The situation has become critical that European leaders reportedly are working on the issuance of joint euro bonds to rescue euro.  That might save the euro, but here's one scary question for all--How long can this bailout train and money printing press keep on running?

 

Further Reading - Euro Bond: Europe's Only Way Out For Now

 

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Mon, 06/11/2012 - 14:49 | 2515588 pagan
pagan's picture

"-How long can this bailout train and money printing press keep on running?"

 

It can run as long as the taxpayers in northern Europe can be fooled by their politicians who takes the orders from the bankers.

Mon, 06/11/2012 - 13:10 | 2515260 John Wilmot
John Wilmot's picture

"The situation has become critical that European leaders reportedly are working on the issuance of joint euro bonds to rescue euro."

Golly, what a surprise. I'm surprised, aren't you surprised?

...it's not like this was the gameplan from day one in EuroLand.

Read my lips: the power of the purse is moving to Brussels, good-bye nation-states

Mon, 06/11/2012 - 12:52 | 2515177 Eric L. Prentis
Eric L. Prentis's picture

Malinvestment, malinvestment and more malinvestment—the economic consequences of additional bank bailout insanity, throwing good money after bad, is devastating, long-term.

 

The 1% banksters continue to win, screwing the 99%. One-hundred thousand psychopathic banksters should be in prison for five years and barred from the financial industry for another ten years. This is the only way to get the fraudsters out of the political process, so we can implement real economic change.

Mon, 06/11/2012 - 15:39 | 2515762 disabledvet
disabledvet's picture

need to come up with the money first for you to be right. this article is incorrect and as such "pure propaganda" as well. "passing on the chain letter" as it were. there is no "100 billion"...only "twenty" or so. not nearly enough and as a consequence "the market responds." negatively. call it "false headline risk" if you will."

Mon, 06/11/2012 - 11:43 | 2514832 Snakeeyes
Snakeeyes's picture

It won't do any good! I was on CNBC with Jeff Miron from Harvard and we both agreed that insane spending is the root cause (as everyone on ZH knows) and nothing will be fixed until runaway spending and entitlements are fixed FOR GOOD!

http://confoundedinterest.wordpress.com/2012/06/11/spains-bank-bailout-fizzles-italy-now-in-the-bailout-cross-hairs/

Mon, 06/11/2012 - 11:26 | 2514746 Stuck on Zero
Stuck on Zero's picture

Spain may be hurting but their real estate sure is expensive.  http://www.viviun.com/Real_Estate/Spain/.  It makes California look cheap.

Mon, 06/11/2012 - 17:35 | 2516096 snblitz
snblitz's picture

A friend who lives in Madrid has kept me appraised of his own real estate travails and real estate in general in Madrid.

He has been unable to sell any of his properties.  Mostly he gets offers 40 to 70 precent below asking. 

He also reports lots of 2 for 1 deals in what we would call condos in the US.

Mon, 06/11/2012 - 09:46 | 2514165 Grand Supercycle
Grand Supercycle's picture

Rally Warning from last week:

'Daily chart now gives bullish warning and significant
SPX rally & USDX retracement should commence in a week or so'

http://www.zerohedge.com/news/2012-12-24/market-analysis

Mon, 06/11/2012 - 09:31 | 2514125 ElvisDog
ElvisDog's picture

Eurobonds would buy quite a bit of time, but it would be the final nail in Euroland's coffin because it would entrench the existing, unsustainable socio-economic structure in Europe for a few more years, all the way eating away at Europe's economic vitality (such as it is today). It would lock them into a hyperinflationary path or it would create a zombie economy that would make Japan look like an asian tiger. Great choices.

Mon, 06/11/2012 - 15:40 | 2515767 disabledvet
disabledvet's picture

still doesn't solve the problem of the money. "the money is worthless" RIGHT NOW...so will be the mythical "euro-bonds."

Mon, 06/11/2012 - 15:10 | 2515663 battle axe
battle axe's picture

Come  on Greece, lets break this son of a bitch this Sunday the 17th.

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