Spain's Troubles Continue To Impact Global Markets

Includes: DIA, IVV, QQQ, SPY, VTI
by: The Value Investor

During last week, problems in Spain have resurfaced again amidst a string of signs indicating that the Eurozone's fourth largest economy comes under pressure once again.

Record ECB Lending

Spanish banks borrowed a record 316.3 billion Euro ($415.9 billion) in March from the European Central Bank. In December and February the ECB made $1 trillion in emergency three year loans available to the European banking system to avoid a liquidity crisis. The injection calmed markets in the Eurozone and led to narrowing credit spreads with government bond yields across the Eurozone converging. Despite signs of renewed distress President Knot of the Dutch Central Bank said there was no need for the ECB to engage in buying Spanish bonds. Signs about record borrowing spooked global markets as Spanish banks tapped the ECB for "merely" 170 billion Euro in February.


Last month the government unveiled new austerity plans with 27 billion Euro in new tax hikes and spending cuts. Public sector salaries will be frozen for the year and departmental budgets are reduced by 16.9%. On top of that some 12.3 billion Euro will be raised in additional taxes by increasing the tax rate for large companies. The measures are sizable at 2.5% of Spanish GDP. As a result of the austerity measures unions send their workers on the streets in Spain's largest cities and the support for right wing Spanish Prime Minister Rajoy fell sharply.


The central government ordered Spanish banks to raise some 50 billion Euro in new capital to built a capital buffer for the losses they still need to take from their property related investments. Large banks like Santander and BBVA have profitable foreign activities, it is largely the domestic focused banks which are in trouble.

In total the Spanish banking industry has some 300 billion Euro in property loans on their books. According to the Spanish central bank more than half are troubled loans. Banesto's CEO Canteria mentioned that the "underlying bad loans trend will keep worsening this year" when the bank reported disappointing earnings earlier this week. A Citigroup research report indicates that home prices in Spain are likely to fall 20-30% further thereby worsening the credit quality of the loan book.

Economy and Deficit

New austerity measures will lead to an expected 1.7% contraction in the economy this year which marks the second recession in three years. The austerity measures will reduce Spain's deficit from 8.5% to 5.3% in 2012. Independent commentators say the budget is not credible as the cuts are insufficient given the deteriorating growth prospects. Consumers remain largely spared in the latest round of measures with unemployment benefits and pensions untouched. Furthermore the value added tax rate remains unchanged as employment within Spain is already very low. The country has a 24% unemployment rate with youth unemployment estimated above 50%

Market Stress

As a result of all the bad news ten year government yields increased 20 basis points to 5.93%. Furthermore the leading IBEX-35 stock index closed 3.6% lower on Friday ending up at three year lows. Signs of weakness regarding implementation of austerity measures, a larger deficit or weaker economic growth could send global markets southwards once more this week, thereby triggering an official correction across global markets.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.