Continued from Part One.
Although its government finances don’t look so bad relative to Italy’s, Spain has the potential to go the way of Ireland, where relatively low government debt ballooned as the state was forced to bailout banks. As with Ireland, the problem will be the property market; in Spain’s case, it is the opaque state of the local Cajas savings bank finances.
As Liam Halligan wrote last week, total private sector debt in Spain is almost 300 percent of annual GDP, half as much again as Italy. With property prices 30-40 percent down on their 2007 peak, swaths of non-performing loans lurk on the balance sheets of Spanish Cajas with potential as the economy slides further to default and create a massive domino effect.
Don’t Let the Prime Minister Fool You…
Whatever Mr. Roy’s assurances about the state of Spain’s economy, the figures tell a different story. Output fell 5.1 percent year-over-year in February, after 4.3 percent in January and 3.5 percent in December. Durable goods fell 14.8 percent, the sixth successive monthly fall. Capital goods output fell 10.6 percent, according to an article last week. Unemployment is already 23.6 percent on the Eurostat measure. David Owen from Jefferies Fixed Income expects this to reach 27.5 percent by the end of the year (which is roughly 32 percent using the old measure from the 1990s, based on a Bank of Spain study).
This is socially and politically an untenable situation. Informed Spaniards are beginning to talk about life after the Euro — and this is before the powerful unions have begun to seriously oppose the imposition of austerity measures for which the government is signing up.
Greece was hugely significant both last year and this year for commodity markets, not just directly impacting buy and sell sentiment day by day, but undermining the whole ethos of investment in what became seen again as riskier commodity products.
The size of Spain threatens the very existence of the Euro in its current form, so stand or fall with the single currency, daily news from the area will continue to cause immense volatility in spite of otherwise strong fundamentals for metals like copper.