Spain on the Precipice

20-Apr (USAGOLD) — Gold is narrowly confined, despite a softer dollar tone. The euro was boosted by a German Ifo beat and the likely misplaced hope that the latest G20 meeting, commencing today, will provide some sort of global solution to the resurgent eurozone debt crisis.

Along similar lines, the IMF seems confident it will receive a $400 bln boost to its firepower, based on commitments from more than a dozen countries. The US, already the biggest contributor to the IMF, remains reluctant to pledge more.

However, it’s now Spain that is on the front-burner of the European sovereign debt crisis, the fifth largest economy on the Continent. Spain is clearly too big to fail, yet perhaps just as clearly, it’s too big to save. Despite all the extraordinary measures already employed to stabilize Europe, Spain appears on the brink of implosion.

This series of MoneyGame charts from earlier in the week pretty clearly illustrate the severity of the problems in Spain:

The percentage of bad loans at Spanish banks continue to rise. Note that while the pace slowed during last year’s tepid economic recovery, the trend remained disturbingly positive.


Exacerbating problems for the Spanish banks is the good old fashion bank run reflected in this chart. Depositors are fleeing in droves, forcing the banks to borrow from the Eurosystem to maintain solvency. It is becoming increasingly clear, that even in the wake of the massive ECB liquidity operations, Spanish banks may well need to be bailed out.


Spain’s IBEX35 stock index is down nearly 20% this year alone and even with today’s rebound, off about 56% since the 15,945.70 peak from late-2007. Ouch.


So what’s the G20 to do? Well the first thing they’re going to do apparently is to echo the sentiments of the ECB and tell the European politicians that the responsibility for the debt crisis lies with them. Not exactly the initial confidence builder the market was hoping for, and Spanish and Italian bonds in particular are back under pressure.

With Spain’s economy already getting crushed by austerity, unemployment on the rise, the banks under severe duress and its stock market plummeting, I’m wondering what exactly the G20 and the ECB see as the options available to the Spanish government. Perhaps this is just further retribution for Prime Minister Mariano Rajoy’s rejection of the agreed to deficit reduction target. Maybe the not so subtle message here is get back on the more severe austerity track, or we’ll let you wither on the vine.

However, as we discussed in commentary earlier in the week, this is a dangerous game to be playing, as austerity measures have a tendency to insight civil unrest and the downfall of governments. On the other hand, Spain could conceivably opt to exit the EMU, go back on the peseta and repudiate all or a portion of its euro denominated debt.

Such a decision would unquestionably come with its own form of pain, and not necessarily just for Spain. The IMF warned this week in its World Economic Outlook that a “disorderly default and exit by a euro area member” could lead to “a full-blown panic in financial markets“.