Are you sick and tired of the endless coverage of the Greek and Italian meltdowns? Marc Chandler the global head of currency strategy for Brown Brothers Harriman says you ain't seen nothing yet. To date there's only been "big political theater in Italy and Greece, just a side show" Chandler says. "Now we can focus on the real problems and Spain encapsulates them."
Spain has flat to negative economic growth and leadership committed to the austerity package being pushed onto other members of the PIIGS nations --Portugal, Italy, Ireland, Greece, Spain. While not optimal, countries can stagger along in such a condition for ages provided they have the complicity of the bond markets which fund them. Alas, the bond markets are rather abruptly demanding much higher rates in exchange for taking on the risk of a Spanish default. In the words of a famous Danish politician, there's the rub.
The yields on Spanish 10-years tell the story. One year ago Spain would pay you 4.5%. A month ago the number was up to 5.25%, and has since spiked 100-basis points to today's yield of 6.25%.
Austerity or not, Spain can't fund itself for long at these rates. If some form of aid doesn't come Spain's way soon, things are going to get ugly. The fact that the Europeans are the only rescue team extant is chilling prospect for Spanish bulls.
Pointing to the endless number of plans that have come and gone since the crisis began, Chandler says "Europe can't get out of their own way." Germany and France have diverging interests, with the former much better positioned to withstand more economic shocks. As the only grown-up economies still standing in the Eurozone, Germany and France are the only ones still able to shape an agreement. It looks increasingly likely that deal will only come over the PIIGS' dead bodies.
Chandler takes the other side of my view that the Eurozone's destiny is to hideously unravel and be exposed as one of the great economic follies in history. "The Eurozone survives," he says. "The solution is greater integration, rather than less."
Until then, virtually everyone agrees that tensions are going to increase and coverage of the European trainwreck will continue. Brace yourselves, people, this is going to get even worse before it gets better.
Is Spain the next shoe to drop? Let us know your thoughts in the comment section below.
- Brown Brothers Harriman