It really does seem to be All Spain All the Time, but there is a reason. Unlike Greece, Spain makes a difference to the eurozone. It may be both too big to allow to fail and too big to save. Last week I came across a very informative 50-page PowerPoint on the situation in Spain from Carmel Asset Management. It is too big to send, but I asked Jonathan Carmel to draft a smaller document with some of the key points. I find it compelling. You can access the entire PowerPoint on my website. If you are not registered with me, you will need to enter your email address and, if you would, your zip code or country. There is a lot if information and data in the report. It will certainly make you think.
I want to emphasize that I do not think Spain is hopeless. Rather, it has a narrow set of limited options that will require a great deal of austerity and economic pain on the part of Spain and significant help from the rest of Europe, combined with the forbearance and patience of the bond market or massive buying of Spanish bonds by the ECB for an extended period of time. I think it will need to be the latter, as the bond market is on the brink of breaking down on Spanish debt, failing a realistic path to economic balance and growth. The way ahead is most difficult and treacherous. It appears to me that at the end of the day only ECB participation can buy Spain the time it needs. If they give Spain the time, it can get through. But the pain will then be spread to the valuation of the euro and thus the entire eurozone.
Is a new fiscal compact a possibility? One with nations giving up control of their budgets and a euro-wide bond issue by which all the nations guarantee the others' debt? Or is there some middle option? Anything is possible and everything will be discussed, as the cost of a eurozone breakup would be massive.
This week's Outside the Box shows some of the reasons why the task is so daunting. Not to mention Italy. And the election results in France suggest a new government may be coming in May, whose leader has promised to renegotiate the recent eurozone agreement, although the details of what that really means are quite murky. And of course France is only a few years from its own crisis, if its deficit is not brought under control. Hollande has said no more austerity yet has not proposed a plan that promotes real growth.
We will soon plunge into yet more last-minute crisis meetings and summits, in which will be hatched yet more "plans." The German Bundesbank will complain about ECB largesse, but they don't control the ECB, as they once thought they did. They are toothless. But any pan-European plan that requires more German pledges (taxes and debt) must get through their legislature. And the Bundestag is most definitely NOT toothless. Can Merkel tame them once again? It will be difficult if the ECB ignores the Bundesbank warnings. You can only push so much.
A very narrow and treacherous path indeed. And it wends all through Europe, not just Spain.
I write this on my iPad from the train to Philadelphia, as I have managed to fry my computer. Somehow, the coffee spilled on the keyboard this morning did not seem to do it any good. Oh well. I get a backup laptop tomorrow. No data lost, just time and money. Sigh.
Your feeling like a rookie traveler analyst,
John Mauldin, Editor
Outside the Box
The Pain in Spain
Spain grew a remarkable 8% per year in nominal GDP in the first nine years after the introduction of the euro in 1999. During this time, Spain focused its economy on housing and selling "the Mediterranean lifestyle." Millions flocked to its sun-drenched shores, buying houses along the way. As the demand for houses increased, construction became the industry. Housing prices exploded, tripling in just over a decade.…