It’s All About Spain
I was on CNBC’s Power Lunch yesterday talking about European debt markets in the wake of the Irish stress tests. I certainly think the Irish stress tests were a significant event. But the Euro Crisis is really all about Spain.
Ireland is having a major crisis but it is a fairly small country relative to the global economy. To give you a sense of what I mean, take the 70 billion euros of money they have used to recapitalise their banks. Apply those numbers on a per capita basis and that figure is 3.5 trillion euros in American scale terms. So we’re talking well over $4 trillion of direct injection, a sum 5 times the size of America’s $800 billion TARP bailouts. That shows you how small Ireland is relative to an economy like the U.S. But it also shows you the scale of the problem thee.
As for debt holders and the economy, the Irish stress test results will inform future economic paths throughout Europe and globally. I think this has implications for whether the euro zone periphery will continue austerity and whether debt holders will eventually take losses.
Depending on how the Irish stress test are received, the Irish could either finally put a line under the crisis or precipitate more concerns that spill over to Portugal or Spain. It’s Spain that counts since it is larger than the three other eurozone periphery countries combined. We would not like to see contagion to Spain because that would put the whole euro project at risk.
When I put this to the other Edward, Edward Hugh, who actually lives in Spain, he wrote:
Edward, I am not optimistic. The issues will come to Spain, and at a time when the other sick man of the global economy – Japan – is totally on the ropes. Look what is happening to CAM today. This is the beginning of the slippery slope.
I agreed, writing "Yes, the CAM thing is a disaster that shows the government’s recap plan won’t work. They need plan B now or contagion is coming." But do they have plan B? Let’s hope so. But we have our doubts.
Video below. Also see the background piece I wrote on the European sovereign debt crisis ahead of the show.