Guest post by Jimmy Kane
Spain’s economy is still slowly limping along, getting worse all the time. Concerns about the European country’s financial condition and mounting doubts about Europe’s ability to bail out the country dragged stock markets and the euro sharply lower on Wednesday.
Although Greece may be the epicenter of the debt crisis, Spain has been a growing source of stress and fear over recent weeks. Everyone’s watching Spain’s banking system and this microscope view has magnified last week after Bankia, the country’s fourth largest lender, announced it need 19 billion euro ($23.8 billion) in state aid.
Not surprisingly, investors are biting their nails that Bankia’s woes might translate across the Spanish banking sector, which suffered terribly from the collapse of the construction industry. This economic recession has unemployment at almost 25 percent, which just adds worry fuel to the concern fire. Some speculate Spain will become the fourth euro country to be bailed out after Greece, Ireland and Portugal.
Given that precedent, who’s to say the rest of the European Union wouldn’t follow suit? It’s not like Germany can bail out the entire continent. Naturally, the European Union’s executive office on Wednesday called on the eurozone to create a so-called “banking union” that can centrally oversee and bail out the sector if it needs to be. Lately, it’s a weak link in a very weak chain in the continent’s financial system.
However, bank failures have already overwhelmed the public finances of Ireland, which has forced it to take an international bailout. Will Spain be next? The European Commission recommended that Spain be given an extra year to meet its deficit targets, however likely or not that seems to happen.
The problem with the idea of bailing out a country the size of Spain is that its economy is double the size of the three countries already bailed-out and investors are skeptical whether a rescue operation can be mounted or would even do anything.
The general malaise hit stocks even harder, particularly in Europe, and the selling was aggravated after a VPRC poll for Epikaira magazine in Greece gave Syriza 30 percent of the vote, followed by conservative pro-bailout New Democracy at 26.5 percent.
This year, Spain’s stock market has been performing as terribly as a legless circus monkey on a unicycle. It dropped yet another 1.6 percent Wednesday – and the country’s cost of borrowing has rocketed higher to frightening levels. The euro itself fell another 0.6 percent to $1.2411, a tiny bit up from its nearly two-year low of $1.2405 hit earlier. Economic confidence also continues to slump.
Jimmy Kane is an avid traveler and Spanish real estate hobbyist. When he’s not traveling or studying the Spanish property market, he maintains a telecommunications website out of his hometown of Dallas, Texas.