Best of the Week
Most Popular
1. Ray Dalio: This Debt Cycle Will End Soon - John_Mauldin
2.Stock Market Dow Plunge Following Fake US - China Trade War Truce - Nadeem_Walayat
3.UK House Prices 2019 No Deal BrExit 30% Crash Warning! - Nadeem_Walayat
4.What the Oil Short-sellers and OPEC Don’t Know about Peak Shale - Andrew_Butter
5.Stock Market Crashed While the Yield Curve Inverted - Troy_Bombardia
6.More Late-cycle Signs for the Stock Market and What’s Next - Troy_Bombardia
7.US Economy Will Deteriorate Over Next Half Year. What this Means for Stocks - Troy_Bombardia
8.TICK TOCK, Counting Down to the Next Recession - James_Quinn
9.How Theresa May Put Britain on the Path Towards BrExit Civil War - Nadeem_Walayat
10.This Is the End of Trump’s Economic Sugar High - Patrick_Watson
Last 7 days
Will US Government Shutdown Cause The Stock Market To Crash? - 18th Dec 18
The Coming Financial Storm - 18th Dec 18
Jeff Gundlach thinks that a Stocks Bear Market has started. Is he Right? - 18th Dec 18
Gold’s Not An Investment – You Won’t Get Rich - 17th Dec 18
Stock Market At Medium-Term Lows, Which Direction is Next? - 17th Dec 18
This Stock Will Drive America’s 5G Buildout - 17th Dec 18
Stock Market Turn In The Tide - Have a Happy Bear Market! - 17th Dec 18
How A NASA Scientist Could Trigger The Next Cannabis Boom - 17th Dec 18
iShares Russell 2000 IWM Leading Stock Market Decline - 17th Dec 18
Where is the Dow Stock Market Santa Rally? - 17th Dec 18
With Weaker Climate Consensus, Expect Elevated Climate Change - 16th Dec 18
SMIGGLE Advent Calendar 2018 UK Contents - What You Get Look Inside Review - 16th Dec 18
Is there a Lump of Coal in Santa's Stock Market Bag? - 16th Dec 18
This Market Will Drive Gold in 2019… - 16th Dec 18
Gerald Celente:Central Banks Can’t Stop a 2019 Debt Disaster - 16th Dec 18
Gold Stocks Triple Breakout - 15th Dec 18
The stock market fails to rally each day. What’s next for stocks - 14th Dec 18
How Low Could the S&P 500 Go? - 14th Dec 18
An Industrial to Stock Trade: Is Boeing a BUY Here? - 14th Dec 18
Will the Arrest of Huawei Executive Derail Trade War Truce? - 14th Dec 18
Trump vs the Fed: Who Wins? - 13th Dec 18
Expect Gold & Silver to Pullback Before the Next Move Higher - 13th Dec 18
Dollar Index Trends, USDJPY Setting Up - 13th Dec 18
While The Stocks Bulls Fiddle With The 'Fundamentals,' Rome Burns - 13th Dec 18
The Historic Role of Silver - 13th Dec 18
Natural Gas Price Setup for a Big Move Lower - 13th Dec 18
How to Get 20% Off Morrisons Weekly Supermarket Shopping - 13th Dec 18
Gold Price Analysis: Closer To A Significant Monetary Event - 13th Dec 18
Where is the Stock Market Santa Claus Rally? - 12th Dec 18
Politics and Economics in Times of Crisis - 12th Dec 18
Owning Precious Metals in an IRA - 12th Dec 18
Ways to Improve the Value of Your Home - 12th Dec 18
Theresa May No Confidence Vote, Next Tory Leader Betting Market Analysis and Forecasts - 12th Dec 18
Gold & Global Financial Crisis Redux - 12th Dec 18
Wow Your Neighbours With the Best Christmas Projector Lights for Holidays 2018! - 12th Dec 18
Stock Market Topping Formation as Risks Rise Around the World - 11th Dec 18
The Amazing Story of Gold to Gold Stocks Ratios - 11th Dec 18
Stock Market Medium term Bullish, But Long Term Risk:Reward is Bearish - 11th Dec 18
Is a Deleveraging Event about to Unfold in the Stock Market? - 11th Dec 18
Making Money through Property Investment - 11th Dec 18
Brexit: What Will it Mean for Exchange Rates? - 11th Dec 18
United States Facing Climate Change Severe Water Stress - 10th Dec 18
Waiting for Gold Price to Erupt - 10th Dec 18
Stock Market Key Support Being Re-Tested - 10th Dec 18
May BrExit Deal Tory MP Votes Forecast, Betting Market Analysis - 10th Dec 18
Listen to What Gold is Telling You - 10th Dec 18
The Stock Market’s Long Term Outlook is Changing - 10th Dec 18
Palladium Shortages Expose Broken Futures Markets for Precious Metals - 9th Dec 18
Is an Inverted Yield Curve Bullish for Gold? - 9th Dec 18

Market Oracle FREE Newsletter

How You Could Make £2,850 Per Month

Spanish Flu May Send European Union to Bed

Interest-Rates / Eurozone Debt Crisis Apr 18, 2012 - 01:52 AM GMT

By: John_Browne

Interest-Rates

Best Financial Markets Analysis ArticleRecently, the world's economic leaders, including economists at the European Central Bank, the European Union, the International Monetary Fund, and the U.S. Federal Reserve, supported by most of the mainstream financial media, assured the world that the debt agreement worked out between Greece and its creditors would help put an end to the European-wide debt crisis. In reality, the crisis has merely been papered over. Despite the broad rally in stock and bond markets over the past few weeks, I firmly believe that Greece will likely require another bailout within a year.


But for all of Greece's fiscal problems, another overstretched southern European nation, Spain, has taken over as the principle actor on the sovereign bankruptcy stage. Unfortunately for the rest of the world, the Spanish economy is nearly five times larger than Greece's. The implications for a Spanish default, then, are proportionately even more severe.

For much of the hand wringing over Greece, the numbers involved were never large enough to seriously threaten the entire global financial edifice. A Greek meltdown would have likely infected the rest of the planet with the economic equivalent of a bad cold. But debt contagion emanating from Spain could be that country's most dangerous export since the Spanish flu pandemic of 1918-19 (which killed some 5 percent of the world's population). If, as some have suggested, a Spanish crisis could lead to questions being raised about France's economic health, the resultant fallout could be the global financial equivalent of pneumonia.

How is it that only a few weeks ago the Eurozone's debt problems were pronounced as 'contained,' yet now Spain has suddenly arrived on the doorstep of a full blown crisis? In reality, recent events were a long time in coming.

As was the case with Greece, Spain likely falsified its national accounts to gain entry to the Eurozone. Membership promised a strong currency and access to a steady stream of buyers to snap up their sovereign debt at relatively low costs. In order to extend the power base of the EU, and to realize the somewhat naïve dream of European unity, the stronger nations of the Eurozone perhaps turned a blind eye to Spain's accounts. Furthermore, EU politicians ordered the granting of massive amounts of cash to countries such as Portugal, Italy, Ireland, Greece, and Spain (PIIGS). These grants acted as effective political bribes to ensure the parliamentary approval of pro-EU legislation. It was a fix and a disaster waiting to happen.

Four years into the financial crisis, things continue to look very bad for Spain. They are still reeling from the bursting of one of the largest housing bubbles on the Continent and social tensions are rising on recent austerity-driven reforms. During the boom, the government spent massively on ill-advised infrastructure projects but, despite all this, unemployment is now at 24 percent overall and, among the young, it's well over 50 percent (see Andrew Schiff's discussion of Spain's wasteful infrastructure spending in a previous newsletter). Like other southern tier countries, Spain has dismal demographics, with a rapidly expanding pool of retirees and extremely low birthrates. The result is a diminishing pool of young workers who can pay for the lavish retirement benefits promised by the government.

Worse still, government officials misled markets about the true severity of their economic plight. The former government maintained that Spain's debt-to-GDP ratio was some 60 percent. Now it emerges that this figure is at least 90 percent and possibly approaching 200 percent when government guaranteed debt is included.

In March, Spanish bank borrowing from the ECB doubled, which indicated a serious decline in bank liquidity. If, as some expect, Spanish real estate declines by an additional 30 percent, the banks will need more cash to prevent defaults. And although the government of Prime Minister Mariano Rajoy has committed to an ambitious austerity program to reduce the government's budget deficit to 5% of GDP this fiscal year, many have questioned whether he has the courage, or even the authority, to see the plans through. To many, the country appears to be following a path much like the one Greece traced out last year.

Private markets tend to punish financial dishonesty severely. Yields on Spanish bonds are widening with their ten-year debt having breached the 6.0 percent level for the first time since December. Later this week Spain faces a major auction of ten-year bonds. Expect markets to be paying close attention.

The time gained by papering over Greek and Italian problems has allowed French and German banks to shed some of their Spanish debt holdings. Voters and even government officials in these nations, then, may be less willing to exert themselves to save Spain. When markets finally realize, however, that debt default [may be - is perhaps] imminent, buyers may be nowhere to be found. The risk of a disorderly Spanish default could spread rapid destabilization, putting enormous pressure on the already weak euro.

The implications of the present situation in Spain could be more far reaching than is currently anticipated and the contagion it represents could lead to a fundamental change in the world's monetary order.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday!

Pre-order a copy of Peter Schiff's new book, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country, and save yourself 35% off!

By John Browne

Euro Pacific Capital
http://www.europac.net/

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.  Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with."  A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

John_Browne Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules