“It’s Not A Tumor” – Kindergarten Cop
The market appears to be blissfully ignoring the massive issues facing Spain due to a better than expected recent auction. But with the impact of the ECB’s three -year liquidity injection starting to run it’s course, Spain will be a big focus for the market going forward. Although the money from the ECB’s liquidity program in theory was put into the Spanish banks, in reality it was used to purchase Spanish sovereign debt which brought a temporary respite to the rise in Spanish bond yields. But since that time, Spain has already missed certain budgetary targets and the economy is contracting rapidly.
Moreover, the massive real estate bubble in Spain is a long way from bottom and the Spanish banks (which just used their liquidity injection from the ECB to prop up the sovereign debt) are unlikely to be able to absorb more real estate losses without more liquidity injections. In addition, if Portugal goes through a debt restructuring similar to Greece it will put additional pressure on the Spanish banking system given their holdings of Portuguese sovereign debt.
The bottom line – this will be an evolving story through the rest of the year that certainly could be the catalyst for a significant amount of volatility if Spain (and more importantly the Spanish banks) are unable to deal with the aforementioned issues.