Spain's Temporary Lifeline

Includes: FXE
by: Erik Dellith

Whew! Spain received agreements for the needed financing. The euro lives another day. Of course, the euro wasn't going to fall apart on Monday if Spain hadn't received the financing over the weekend, but it would have put more pressure on the currency and many of the weaker economies. The question then becomes: What's next?

As expected, Spain asked for help over the weekend. As expected, the eurozone finance ministers agreed to help Spain. If that had been it, then we could expect a bit of a relief rally, "thank goodness we dodged that bullet" type of reprieve.

Yet, there are a couple of interesting parts to this. First, the IMF had conducted an analysis of Spanish banks and concluded that "the core of the system appears resilient," yet certain institutions needed to beef-up their capital by about 40 billion euros. That's not the interesting part. The interesting part is that the eurozone finance ministers agreed to loan Spain up to 100 billion euros.

What's so interesting about that, you may ask. It sends a clear message to the markets that the finance ministers are willing to go the distance, and then some, to make sure that this experiment with a single currency succeeds. That should be sufficient fuel to ignite a nice stock-market rally.

This brings us to the other interesting part of this. The celebrations will likely be short lived, because this loan changes very little in terms of the structure of Spain's economy.

Sure, the money will provide needed capital to banks, so that they can keep on lending. But it is important to question who will be borrowing the money. While it would be nice if small- and medium-sized businesses took on loans to finance expansion, it is difficult to foresee such a dynamic in a county where the unemployment rate is approaching 25%.

If the unemployment rate were quickly falling, then it would be easier to agree that pent-up demand would provide a nice catalyst for small business development. I don't see that happening, at least not on the immediate horizon. It is important to keep in mind that the unemployment rate in Spain is not only high, but has been ticking higher, according to EU statistics (pdf). The country has already undertaken austerity measures. And, of course, the latest economic statistics point to recession, which will do little to help support real estate prices, which some estimate will continue to fall. With that in mind, I have difficulty finding the necessary catalyst for growth in Spain.

Now, we could develop some nice, crisp econometric models to figure out the likelihood that this loan, and the recapitalizing of Spain's weaker banks, will work to support the economy and enable businesses to grow, but based on current trends, it seems as if we would fare just as well by calling tails while flipping a coin of the two-headed variety. While this loan might help to provide a floor to Spain's economy and the euro, Spain has a long way to go before it really starts looking up. As has become the habit of late, the euro was tossed a life vest, but it is still waiting for a real rescue.

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