Monday, July 23, 2012

Spain To Big To Fail, so they said!

The news out of Spain is that the country has banned short-selling of stock shares for three months in an effort to limit the market sell off. Markets fell sharply on fears the country may need a full bailout, things turned negative on Friday, just hours after the Eurozone's finance ministers agreed on an interim bailout of the banks. The reaction caught the Spanish government by surprise. They expected their  borrowing costs would ease as a result of what they described as a "prompt and well-defined clean-up operation". Instead rates have again soared above 7%, a rate that is not sustainable. Spain is effectively shut out of the markets and cannot afford to finance itself.

The mood in Spain has turned sour, the people have grown weary of austerity and are increasingly rebellious. It was under-reported at the time but the protesters on the streets last Thursday night in Madrid may have reached 100,000 as rubber bullets flew. There were protests in 80 other towns and cities with off-duty police and firefighters sometimes joining in. What is significant is that it is no longer just the unions on the streets other citizens are joining in. More bad news was heaped upon Spain on Friday, Valencia, one of the country's 17 regions, asked the central government for a financial lifeline, and on Sunday, the Murcia region said it was considering following suit.

The financial problems in Spain are in some ways similar to those of Ireland. Spain has wildly over built during the last decade. Empty buildings and homes sit everywhere, real estate prices have now tanked, and unemployment has soared. The banks are sitting on billion of dollars of bad loans that will never be repaid. The cost of supporting the unemployed coupled with a drop in tax revenue has caused a huge government deficit. Bleak is the best word to describe the situation. To make matters worse, the government is predicting  the economy will further contract next year.

If there is is not enough gloom hanging over Europe, focus is also returning to Greece's woes. On Tuesday, officials from the so-called "troika" - the International Monetary Fund, the European Commission and the European Central Bank - will arrive in Greece to assess the progress made on reforms that were agreed as part of the country's latest bailout. Reports over the weekend suggested that the IMF will refuse calls for further aid, if, as expected, the country fails to meet targets for cutting spending and raising taxes. The IMF did say it would work with the country to get it "back on track". But the foot note from the IMF, "the viability of the monetary union is at stake" is not something to take lightly.


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