Spain the next big Storm

Spain is under severe stress. The IBEX plunged today again. Despite all the problems Spain faces, many still live in total denial when it comes to the Spanish situation. Here is a reminder of some important facts about the situation. By Edward Harrison of Credit Writedowns.

Troika Program: The rumor roiling markets is that contingency is being made for Spain to access the Troika programs. The government has denied these rumors. But they persist nonetheless. And this is not the first time we have heard this. Read On the alleged plans for a Spanish bailout from November of last year. I am sceptical but this is what’s being said.

Weak banking system: And remember, we are talking about debt that is on the books already. There are the contingent bank liabilities as well, the sort of thing that has got Ireland into trouble, when it assumed it’s banks’ debt. First, the discussion in the media recently has been about Spanish bank addiction to the ECB lending facilities. What is happening is that Spanish financial institutions are playing the carry trade in a major way.

Housing: Where Spain’s banks are vulnerable is in housing and land. Land and property values are still sinking in Spain (as they are in the US and Ireland, two other former bubble economies). This will continue to be a drag on growth. However, the more pressing concern is how this impacts financial institutions’ balance sheets because Spanish banks have not taken the credit writedowns the Irish banks have done.

Local government: Spain’s central government does not have control over the spending of autonomous regions in Spain. In the past, there has been a lot of chatter about forcing these governments to consolidate because their deficits are accounted for in the Spanish deficit figures.

Full article here.