Spain's Problems Are Swept Under the Rug... for Now
"If I didn't see it, it didn't happen." "What you don't know can't hurt you." "Out of sight, out of mind."
I haven't figured out which phrase best embodies the way European leaders are viewing Spain's economic worries, but all three encompass the main notion that Spain's problems have been swept under the rug to be dealt with at a later time.
Over the weekend while you were out enjoying the warm weather, or as we in Seattle call it, that rare dose of the yellow fireball in the sky, the eurozone finance ministers agreed to lend up to $125 billion to Spain's banks in the hopes of better capitalizing them and avoiding a financial contagion.
The amount being lent is significantly higher than anyone had predicted and speaks to the seriousness of Spain's woes. The country, which is heavily reliant on housing growth to drive employment and grow retirement savings, is dealing with an unprecedented amount of doubtful commercial real estate loans that could be as high as $220 billion according to the Bank of Spain.
In just the last few weeks we've seen large Spanish provinces pleading with their government for funds to cover their debts and the nationalization of Spain's fourth-largest bank by assets, Bankia. Bankia possesses more toxic CRE loans than Spain's other banks, but this does not by any means signify that Spain's larger banks by assets, Banco Santander (NYS: STD) and Banco Bilbao Vizcaya Argentaria (NYS: BBVA) , are free of potentially toxic assets in their portfolios either.
While this move will certain allay recent worries that the eurozone was in an inevitable death spiral, it shouldn't.
For one thing, the move doesn't do anything to boost Spain's economy. When people wake up tomorrow they'll still be dealing with an unemployment rate of 24.4% and falling housing prices. Finance ministers can throw all the money they want at Spain's banks, but it does nothing to fix the country's broken economy.
More important, when was the last time we saw a eurozone nation fixed by its throwing money at its banks? EU leaders tried that with Greece in May 2010 by throwing $147 billion at its ailing economy. In February of this year, Greece received a second bailout package of $170 billion and a resolution to its mess still isn't clear. Ireland received $113 billion in November 2010, and is currently mulling the need for a second bailout in 2013 when its original bailout funds will run out. Portugal needed a $97.5 billion bailout in 2011 to avoid catastrophe, but things may still not be that rosy, with Lisbon forecasting an unemployment rate of 16% next year.
Eurozone finance ministers can play a sleight-of-hand trick with investors all they'd like, but it's not fooling me! Start your clocks now because it's only a matter of time before Spain comes crawling back for an even bigger bailout.
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