Portfolio

Spain is in the 'hot seat' of the crisis

By Sara Carbonell

Date: Wednesday 30 May 2012

Spain is in the 'hot seat' of the crisis

The market has gone from talking about the Greek debt crisis and its vulnerable bailout deal with the 'Troika' to Spain and the recapitalisation of its banking sector.

"It's all about what happens with Spain and their banks, and what could be the scenario in terms of how much money they ask for," BNP Paribas SA currency strategist Mary Nicola told Bloomberg. "But there's still that Greek shadow."

John Nyaradi, the publisher of the Wall Street Sector Selector, agrees that despite the uncertainty with Greece, Spain is in the "hot seat of the global financial crisis."

"For the past two years, the 'Greek Tragedy' has been roiling global stock markets and now appears to be coming to its final climax with new elections to be held on June 17th. Citigroup forecasts that Greece will depart the Eurozone in January 2013, and analysts estimate that the Eurozone's GDP could decline as much as 4% in the event of a 'Grexit,' which is comparable to the recession that ensued after the collapse of Lehman Brothers in 2008,” said Nyaradi. Deposits have been fleeing Greece since 2009 and appear to have picked up recently, he added.

Nyaradi explained how the Greek situation pales in comparison to Spain and how the newsflow around the fifth-largest economy in Europe has been constant, including the nationalisation of Bankia, spiking government bond yields and risk premiums, and the possible need to support Catalonia with its debt load.

"Spain's leader, Mariano Rajoy, insists that Spain won't need outside help but investors obviously don't agree as Spanish credit-default-swap pricing rose to record levels last week, the euro has been pounded down (…) and Moody's recently downgraded 16 Spanish banks, including heavyweight Banco Santander,” he explained.

Nyaradi sees three options for investors during these uncertain times: to head to the safety of cash or bonds "as many retail investors have recently done"; "Ride it out", which is increasingly difficult; "Seek profits from the current situation."

Nyradi says this option requires discipline and well-thought-out strategies. "Danger and opportunity always arrive hand in hand, and today's climate offers potentially big dangers and big opportunities."

"The European debt crisis has been buffeting world financial markets for two years and today appears to be growing in intensity and danger as Greece comes to its final act and Spain reaches the boiling point. No one knows if Europe's leaders have the political will or fiscal firepower to avert disaster, but investors need to fasten their seat belts and prepare for the extreme turbulence that lies ahead," Nyradi concludes.

SC

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