Let's Look at Spain and EuropeJuly 23, 2012 @ 8:44 AM EST
The following premium content was originally published on the PRO Trader Service on Sunday, 22-July at 4:42 pm CDT
The Euro is trading at $1.2088 in early trading. This compares to $1.2155 in late trading in New York on Friday.
EUR Down = USD Up.
USD Up = "RISK OFF"
At least that's how it usually works. We'll have to see how the "bots" act as trading begins for the week.
Out of Europe and particularly Spain and Greece the latest information is indicating that the situation is continuing to deteriorate. It seems to me that the pace is picking up speed. We've had an IMF damning resignation letter made public and with that the perception of the IMF has likely been at least somewhat tarnished. The IMF is taking a harder line with Greece and several stories have surfaced which express that there has been a raising of the odds of a Greece exit from the European Monetary Union.
In regards to Spain, the size of the bank bailout is looking more and more as if it will fall well short of the true amount of funds which will be needed in the end. Also, the floodgates appear to have opened regarding Spain's Regions and their actual and potential requests for aid. Following last week's announcements that first Catalunya and then Valencia would need a bailout, Friday evening's and this weekend's reporting has brought word that as many as 6 additional Spanish Regions could be in need of help.
Those mentioned so far are:
- Balearic Islands.
- Canary Islands.
The situation is fluid and nothing definitive has yet been determined but these regions are to varying degrees looking into a variety of options to deal with their financial shortfalls. That includes the possibility of tapping the 18 billion euro bailout mechanism which the Spanish government created just last week.
CB Note: So let me get this straight. A nearly, but not officially, bankrupt country which is running huge budget deficits itself and which can no longer access the debt markets at reasonable rates and whose securities are rated as "junk" by Egan-Jones and only a step or two above junk status by S&P, Moody's and Fitch and which needs to get a EUR100 billion bailout for its banks, still manages to set up its own EUR18 billion support fund to be used by its deficit running regions: if needed.
Where's it getting the 18 billion from?
OK. Back to the issue at hand. The problem as I and many others see it is that it is rather highly likely that there isn't enough money in Spain's region bailout fund to cover all the aid requests of all the regions which will in the end need assistance.
Then what happens?
My concern is that we may not be very far away from a formal and official EU bailout of Spain. Now let's consider that possibility for a moment and what may be the ramifications thereof:
- Spain's GDP as of 2011 was about $1.494 trillion using IMF figures, placing it as the fourth largest economy in the Euro-area.
- Greece's 2011 GDP was about $0.303 trillion as per the same IMF figures.
- As its own debt was beginning Greece's GDP was very roughly about $0.350 trillion.
- Also using big round figures, Greece's bailouts have totaled between 250 billion and 300 billion euros.
- After some 3 years of plans, hopes, programs, bailouts and targets it seems the Greek crisis was not resolved by the EUR250 billion+ bailout.
N-cubed "points to ponder":
- If 250 billion euros or more was needed just to kick the "Greek Can" down the road for a few years then what will be the real amount needed for Spain?
- Since Spain is more than 4 times the size of Greece, could its bailout amount be proportional?
- If so, that would mean a bailout expenditure of more than 1 trillion euros.
- With Ireland, Portugal, Greece and Cyprus already needing to be bailed out they probably won't be able to contribute to Spain's bailout.
- Finland's collateral demands mean that they really aren't net contributors to any further bailouts.
- That leaves only 11 European Monetary Union members to share the burden of providing support for Spain.
- Will a struggling Italy really be able to provide its proportional share of a new EUR1 trillion bailout?
- Will German voters be agreeable to another large removal of funds from their wallets?
And finally, have traders, investors, HFT's, Algo's, Quant's and other computer-bots even begun to factor in the possibility of a Spain request for aid?
If not, then what's in store for us?
This is Curt Bergquist - your N-cubed (Nattering Nabob of Negativism) glad that I could provide you all with just a few cheery thoughts to brighten up the last few hours of your weekend.
Have a good one...
Manager – PRO Trader Service
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