SPAIN: Why it’s Still the Most Likely Catalyst for Catastrophe

Rodney Johnson | Friday, August 02, 2013 >>

Spain’s Prime Minister is currently under suspicion that he financially benefited from a political slush fund. 

He must be thrilled to have this come up now because it distracts people from the disaster that is the Spanish economy.

For more than five years, the country has flirted with recession. There is no growth. Unemployment moved ever higher, eventually reaching 27.2% before it fell ever so slightly last month.

The kicker, of course, is that more than 50% of those under age 24 are unemployed. This figure excludes those in college. It truly means that more than half of Spain’s young people, those not in school or prison, do not have a job. That’s tough stuff.

But it doesn’t stop there.

Spain’s pain is mostly due to its lending explosion. When it joined the European Union and adopted the euro, it had much higher interest rates than other euro zone countries. This meant foreign deposits flowed into Spain at a rapid pace as depositors sought out high interest payments.

The influx of cash left Spanish banks with gobs of money that they needed to lend out in order to pay the interest on the deposits. The natural place to make loans was on property, both to builders and to buyers. Thus, a property boom was born.

Of course, as soon as the cracks began to show in the façade of Spain’s property markets, foreign depositors got nervous. They asked for their funds back and took them to more secure markets. This left Spanish banks dead in the water, with almost no liquidity.

To top it off, the country’s once-great borrowers are now late on their payments. In fact, non-performing loans make up more than 10% of all loans in Spain, up tenfold since 2007. This is after the Spanish government moved a chunk of bad assets to a “bad bank.”

Then it gets worse. Loans overall are shrinking. The size of the total loan portfolio in Spain fell by 12% for the year ended in April.

Shrinking deposits (smaller deposit base), shrinking loan portfolios (smaller asset portfolio) and higher bad debts (more write offs) can only mean one thing: insolvency. Spain’s banking system is racing over the cliff.

Just as in the U.S., bank lending for construction and property purchase is a major driver of the Spanish economy. As this sector moves backwards, not even maintaining its position, it becomes a major drag on the entire economy.

Consumers lose money. Contractors fail. Jobs disappear. Construction spending, business equipment spending, and consumer spending all drop. So government tax receipts drop.

And about that decline in unemployment everyone’s so excited about…

At 0.9%, it’s almost meaningless when over a quarter of your working population is out of work.

All you can hope for is something – anything! – to distract people from the real state of the economy. Thank goodness for a slush fund scandal.

As we look down the road, nothing on the horizon points to a recovery for Spain. This country has the fourth largest economy in the euro zone, so it’s “too big to bail.” When Spain finally crumbles, the euro zone won’t be able to save it.

This is why we still see Spain as the most likely catalyst for a breakdown in the euro zone.

Don’t be lulled into a sense of wellbeing about the euro zone just because it fades from the headlines from time to time. Their problems are so large, their debts so big, they’re insurmountable.

It’s only a matter of time.

 

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Categories: Economy

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.