Now Spain Circles the Drain
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What really has people worried is contagion: that if Greece goes then so will Italy and or Spain and those are problems that are not so easy to shrug off. However, it’s becoming a little clearer that contagion is not really Spain’s problem. It’s not that Greece potentially leaving is leading to people pulling their money out of Spain. Rather, Spain’s problems are home grown and are really only now becoming apparent. A little of Warren Buffett’s point that it’s only when the tide goes out that you can see who has been swimming naked.
The final number will exceed the €14bn Bankia needed to meet government-enforced provisions. The €19bn investment is in addition to an earlier €4.5bn government investment in preference shares which was flipped into equity, giving the state a 45 per cent shareholding two weeks ago. Existing investors face being all but diluted out of the bank unless they take up pre-emption rights to buy new shares.That’s just one Spanish bank that needs that amount of support. There are a few things that should be said here too: Spanish government spending, at least central spending, wasn’t too far out of line in the boom. And the banks didn’t get involved in CDOs and equity booms and all that. Indeed, it’s not actually the commercial banks that are in trouble. Rather, it’s the mutually owned and local banking system, the cajas, which is. The problem is simply the unwinding of a vast property bubble: there was a year or two there where more cement was being poured in Spain than the rest of the EU put together. There are entire fully built golf resorts with villas and apartments which are empty and bankrupt.
Obviously, the banks (as I say again, these are local and mutual banks, not the ogres of Wall Street or City style capitalism) that financed these developments are going bust. Bankia is a recent amalgamation of some seven of these local banks.
To make it worse there is Spain’s highly federal system of government. The regions all have their own debts and budgets and those need to be added to the central government ones.
Financial markets were further rattled by comments from Artur Mas, president of Catalonia, which forms a fifth of Spain’s economy and is larger than Portugal by output, that the region was running out of options to refinance its debts, and wanted backing from Madrid to borrow.And there are stories, stronger than anecdotes but not yet sufficient detail to call it data, that those regional governments have very much larger debts than they are letting on to as yet. Utilities and suppliers have been going unpaid for a year or more so there’s more to add to the debt that the markets can currently see.
As Craig Pirrong points out this is very similar to the way in which the banks before the crisis hid matters in Special Purpose Vehicles. In Spain these were hidden in the cajas and the regions and we’re only now uncovering them. So it isn’t actually that events in Greece are causing these problems in Spain: rather, that more attention is being paid to Spain as a result of what has happened in Greece.
All of which leads to an uncomfortable political truth. What’s happening in Spain is not contagion, therefore it is not a sufficient solution to provide a financial firewall through the ECB or some such. The place is going bust because of its own actions, not as a result of some infection from Greece. So a solution to the Greek problems, whichever way that works out, will not become a solution to Spain’s problems. And it’s very difficult from here in Europe to see anyone acknowledging that fact.
End quote from:
http://www.forbes.com/sites/timworstall/2012/05/26/now-spain-circles-the-drain/
So, even though Greece is now a horror movie for almost everyone living there, as far as the European Union and the Euro goes, if the tide goes out and Spain is found swimming naked without enough financial protection it could be curtains sooner or later for the whole European Union and the Euro, because Spain is simply to big an economy just like Italy to realistically consider bailing it out financially.
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