I have been warning for nearly three years that the failed Euro experiment would not end well – I began sharing these sentiments as Ireland’s real estate bubble ruptured and collapsed its banking sector. A year later I declared a “race to the bottom” for half of the countries conducting commerce in the Euro currency. Greece beat Portugal by a nose in the bankruptcy race, but the question about who will show for 3rd place is a huge one… will it be Spain, Italy, or a horse of a different color?
Right now, Spain is front-running, but working overtime on deniability. Bloomberg is reporting this morning that Spain’s government has asked banks to increase their “provisions for bad debt” by 54 Billion EUR, to a total of 166 Billion EUR, but analysts have already assessed that figure as inadequate – “Taking those [residential defaults] into account, banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, according to estimates by the Centre for European Policy Studies, a Brussels-based research group. Plugging that hole would increase Spain’s public debt by almost 50 percent or force it to seek a bailout, following in the footsteps of Ireland, Greece and Portugal.”
In short, there are now two races being run – the race to the bottom for European solvency, and the race to leave the Euro. Spain may actually win the race to depart the Euro, if they maintain their present course and speed…
But as all eyes are on Spain, Italy, France, and other Euro nations are not out of the race, and should be watched closely.
As We can clearly see, Spain’s market is tanking hard, having lost 1/3rd of its value in the last year. Italy’s market has lost as much in the past year as Spain’s, and France is not that far behind, at -22.76%. While some may argue that private equities are not a clean indicator of sovereign stability, I have to disagree. Nearly every European bank holds a large position in equities as part of its collateral requirements. Since the collateral requirements tend to run opposed to market trends [declining markets indicate increased risks for banks, thus growing collateral requirements] therefore these collateral gaps can widen very quickly as economic conditions worsen. Since the sovereign entity must intervene to prevent the collapse of large, national banks, the bank’s risk is also the sovereign’s risk, plain and simple.
This was a substantial part of the contagion in Ireland. It will cause the same issues in Spain, shortly. But Italy, France, and Belgium are all faced with the same risks, albeit on a slightly longer timeline.
With all the debt overhang in Europe, I do not have any confidence that the EURO currency, or the EU in general, can survive. Crumbling finances and rising nationalism are definitely on the menu throughout Europe, and will be for quite some time.
The US Debt problem is actually as bad as all the European nations combined. Thus, what happens in Europe MUST come here. The more violent the collapse in Europe, the faster the shock waves will reach our shores, and the more damage they will do here. We have been warned.
Former Treasury Secretary Robert Rubin explains: