PIIGS: Spain down, now we wait and see
Did I call Spain or what? Check it out. So, Spain got downgraded by a small ratings firm. That isn’t the death knell, but it does not bode well for when a larger ratings firm takes a look at it (and they all should be releasing stats soon. It’s second quarter now). Spain is leveraged at 70% of their GDP. That means that for every euro they own they also owe someone else 70 cents. This actually isn’t all that bad when you compare them to Greece who is leveraged 150% of GDP. For reference, the USA is leveraged at about 50% of GDP – the highest it has been since WWII.
Leverage is a funny animal. Basically, what it does is magnify gains or losses. So, when times are good and money is being made, leverage is great. When times are bad and money is being lost, leverage is terrible. Right now, Spain is losing money.
I’m guessing that in the next week, we will see lots of stories about how Italy is going to be next and soon. I don’t think that will happen. Instead, there will be a big focus on Italy while Spain slowly chokes to death and at the last instance their banks will be seized by the IMF – effectively giving the IMF monetary control over all of the EU.
After that – I’m not sure. The IMF can’t tax welfare recipients to refill its coffers. Perhaps they will try to pull the US in with the EU, and that would keep them afloat for a while, but not forever and then the same problem will still be there staring them in the face. The more I think about the IMF and the EU’s welfare programs, the more I envision a child hammering away at the square peg trying to get it through the round hole – it just isn’t going to work.