More on S"pain"

As you know I don't want to be a newsletter summarizing all of the day's stories, but I do believe it is crucial to understand the basic fundamentals of the world economy so you may put things in their proper context. For instance, yesterday the market move up was attributed to Spain selling some short dated debt with a good auction, this is irrelevant considering the debt falls within the 3 year LTRO window. Tomorrow's Spanish 10 year debt auction is what the market is really interested in as well as the 10 year yield and the dangerous 6% level.

One must understand that the combined firepower of the EU bailout mechanisms, EFSF and ESM is grossly overstated as it includes money already committed and counts that as part of a bailout fund, the money is already spent, it is not available. From my best recollection, the combined fund has about $500 bn available. Italy is already backsliding, Greece has already stated they may need more help, Portugal and Ireland have made similar grumblings. However Spain, yet to receive a bailout, is simply too large for the EU to handle should it fall just like Greece, then Ireland and Portugal and Greece again fell. Spain is the "S" in "PIIGS" (Portugal, Italy, Ireland, Greece and Spain), these are the countries that have been causing concern for two years and thus far, everyone has taken a big hit that has required intervention up to this point, except Spain. There's no reason to believe Spain is not next up. However Spain is only 1 part of the problem, when one country has problems, they all do and the rest of the PIIGS are fragile again.

What is really upsetting the market is not only the yields on Spain's 10 year debt near the 6% "unsustainable" level, but the increasingly dangerous non-performing loans in Spain that have in the past been about 1% of the banks loans, they are now at 8.16%, levels which have not been seen since October of 1994. The hole that leaves in Spanish banks' capital is about $144 bn Euros or roughly 10% of Spain's $1.4 tn GDP and there's no end in sight, this percentage of non-performing loans is expected to continue to move higher and at a faster pace then the past.

This is just Spain that we have touched on. Yesterday I mentioned Italy as well.

Today news is out that Italy their bad loans also surge to levels not seen since 2000. Italian non performing loans are now at 6.3%-you see the trend unravelling here?

Tomorrow will be a big day for Spain as well as France as both have auctions of debt. Spain is not expected to do well, should France come in worse than expected, watchout, that nasty word, "Contagion" will be all you hear about in the financial media.