Global Economic Update: Fears Mount Over Spanish Default

Cost commentators now perceive that it is only a matter of time before a Greek default. Shares in De La Rue have already begun to rise in anticipation of new currency being printed should Greece revert to the Drachma. However, Greece accounts for only 2% of the EU economy and has already written down 50% of its debts. The banks (and the markets) have had plenty of time to prepare for a Greek default and the bulk of the debt should already have been written down in their books. 

Of greater concern is Spain which has a much larger economy and any default could trigger a major collapse of the banking sector in the Eurozone. The Spanish banking system is currently in distress. The Spanish government have had to provide €4.5 billion aid to the troubled Bankia, the county’s third major bank. Last Friday it emerged that the bank could need another €19 billion. Investors have now begun to worry that the Spanish government could bankrupt itself in bailing out it’s banks. The Spanish economy has been suffering from recession for some time now. Last month, unemployment rose to 25%, the highest in Europe and bond yields have reached unsustainable levels of 6.5%. Like Greece, Spain is suffering from taking on excessive debt. Leaving the Euro could be their only solution as aid does not appear to be forthcoming from their neighbours in the Eurozone. 

Cyprus is the latest country to be suffering from the Eurozone crisis as its banks have significant exposure to Greece. The Cypriot president has recently requested bailout funds from the ECB. 

Companies are now taking their investments out of Europe as the economic uncertainty is beginning to affect the Euro which has depreciated 7% against the US Dollar.  The US is seen as a safe haven compared to Europe due to its stronger manufacturing and economic base. 

Europe is in deep recession and a banking collapse is likely. Change is required before we can reach equilibrium as too many countries have overstretched themselves and taken on excessive levels of debt.