The Pain in Spain Stays Mainly the Same

by Jeff Reeves | June 11, 2012 8:58 am

eurocrisis The Pain in Spain Stays Mainly the Same[1]In case you spent all weekend passed out on the beach, the big news this weekend was Spain’s decision to request 100 billion euros (or about $125 billion) in bailout recapitalization cash from the European Union.

The big news today, however, is Wall Street’s skepticism of the deal.

You see, the general consensus is that while this was a much-needed move and will indeed provide some temporary relief, the broader narrative of the eurozone debt crisis remains largely unchanged.

Will It Work?

I’ll just start here, since it’s the most important question. The answer: only as part of a much bigger effort.

The biggest problem here is that the big issues are not solved[2] in Europe. A handful of governments still are suffering from the double whammy of huge debt loads and an economic recession. The two feed on themselves, and the cycle becomes hard to break — not just for Spain, but for the whole region.

Heck, maybe even for America, too.

The good news is that Spain’s plan is something — and the bottom line is that this war on eurozone indebtedness is going to take a long time to sort out. In football parlance, this bank bailout in Spain is the equivalent of a “3 yards and a cloud of dust” run between the tackles. As long as the EU continues to advance the ball, investors need not fear a complete breakdown of the global markets.

I mean, the bailout of General Motors (NYSE:GM[3]) and Chrysler totaled $85 billion. So this is hardly a Hail Mary do-or-die.

The problem here, however, is that the status quo isn’t very attractive to investors. The market is roiling with uncertainty, market volume was down even before we hit the summer lull and folks are running for safe-haven investments so fast that U.S. Treasury yields hit an all-time low[4] a week or so ago.

In short, to continue my analogy, the eurozone still is decidedly behind in this game. And the clock is ticking.

For the Banks, Not for Spain

Here’s an important issue to acknowledge to make my point about the broader narrative of the eurozone: The €100 billion loan is only indirectly for Spanish debt. It’s actually for banks, in the hopes they will then lend to Spain in turn.

The theory that recapitalized banks will ease fears and lead to lower bond prices has merit. However, reluctant creditors aren’t just going to applaud and start buying up Spanish debt now.

For instance, The Wall Street Journal[5] today quotes a Credit Suisse (NYSE:CS[6]) analyst who said “there is still no buyer of Spanish debt beyond the domestic investor base, which is basically the Spanish banks.”

So recapitalized banks apparently can buy Spanish debt … but everyone else seems to be sitting out.

And since the Spanish government-bond market rallied last week in anticipation of an aid deal, we might not see all that much more movement. Spain’s 10-year bonds yielded 6.25% Friday, off the peaks above 6.7%. Also worth noting is that despite the “drop,” that’s still a pretty steep yield to pay on its debt.

Bailout Actually Is Just More Debt

Believe it or not, the net level of indebtedness in Spain actually has gone up as a result of this move.

That’s because this bailout of Spanish banks will be tacked onto the total sovereign debt of Spain. That adds another 10% or so[7] to government debt-to-GDP, according to estimates. Granted the government in Madrid was a little better off than, say, Greece … but it’s worth noting that this actually is adding to debt.

Clearly this is not a long-term plan. Critics claim this really is just the government bailing out banks so they can bail out the government, and the cycle will break down quickly. If outside investors don’t step in to pick up the slack, buy Spanish debt and push down borrowing costs, the plan will unravel.

Greece Is Mighty Angry

Remember that rioting in Athens[8] we saw because of harsh austerity plans that resulted in programs being cut and government workers being laid off? Remember the gridlocked government[9] that resulted after conservatives swept to power in Greece in May?

That was because Greece was pretty cheesed about the harsh austerity programs billed as the “only way” to avoid a Greek default.

Well, it appears Spain has gotten itself a $125 billion lifeline from the EU — without the draconian measures.

There is little chance of this going over well in Greece. And the timing couldn’t be more inopportune, considering a crucial round of elections[10] again this coming weekend to determine whether Greece sticks with budget cuts or rejects austerity and risks being booted from the eurozone.

So much for stability. The bailout might have settled down Spain, but it has shaken up Greece big-time.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[11] Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the stocks named here.

Endnotes:
  1. [Image]: http://investorplace.com/hot-topics/europe-in-crisis/
  2. the big issues are not solved: http://www.nytimes.com/2012/06/11/business/global/spain-accepts-bailout-for-its-banks-as-leader-warns-of-tough-year-ahead.html?partner=rss&emc=rss
  3. GM: http://studio-5.financialcontent.com/investplace/quote?Symbol=GM
  4. U.S. Treasury yields hit an all-time low: http://investorplace.com/2012/06/stocks-may-actually-be-your-safest-investment-right-now/
  5. The Wall Street Journal: http://online.wsj.com/article/SB10001424052702303768104577458562351966868.html?mod=WSJ_hpp_LEFTTopStories
  6. CS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CS
  7. That adds another 10% or so: http://www.huffingtonpost.com/2012/06/10/joseph-stiglitz-spain-bank-bailout-euro-reforms_n_1585399.html
  8. rioting in Athens: http://www.thedailybeast.com/articles/2012/02/13/greece-riots-have-greeks-had-enough-of-austerity.html
  9. gridlocked government: http://www.nytimes.com/2012/05/08/world/europe/greece-in-chaos-faces-possible-new-elections.html?pagewanted=all
  10. a crucial round of elections: http://www.boston.com/news/world/europe/articles/2012/06/11/greece_elections_pose_a_crucial_dilemma____qa/
  11. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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