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Europe’s Woes Flare

April 4, 2012
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First, debt problems slammed Greece. Now, they are hitting Spain.
 
Recent events in Spain have emerged that make the country the next potential hotspot that could flare up into a recessionary fire in Europe. The latest headlines in Spain reveal that the nation’s budget/deficit issues are coming to a head.
 
Yesterday’s bond auction in Spain was pretty weak, with the country only selling 2.3 billion euros worth of 4-8 year debt at yields sharply higher than previous auctions. Spanish bond yields have risen back above 5.5%, and that trend doesn’t augur well for the country’s economy, or the European Union. It also doesn’t bode well for Spain’s stock market, which has pulled back significantly over the past year.

 
The chart here of the iShares MSCI Spain Index (EWP) shows the cratered sell-off in the country’s stock market. I think this situation could be the first big domino to fall in the European Union. If we see Spain go the way of Greece in terms of having to impose hefty austerity measures, it could put some serious pressure on global markets going forward.
 
Now, lest you think I’m too concerned about the situation in Spain, consider what the country’s Budget Minister Cristobal Montoro said in a recent news conference after delivering the nation’s cost-cutting budget.
 
Spain is a critical situation,” Montoro said. “That is what we’re trying to address.”
 
When you consider that Spain will borrow 186.1 billion euros this year, and that its debt-to-GDP ratio will rise to 79.8% from 68.5% in 2011, you get a sense of the problematic situation. Then when you factor in that the European Union limit on debt-to-GDP ratio is 60%, you see that Spain is in dire straits.
 
So far, the selling in Spanish stocks hasn’t had a big impact on global equities, but all of that could change quickly if we see Europe’s debt issues continue to spread to more and more countries.