European Debt Crisis: "Imagine the Worst and Double It"

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European Debt Crisis: "Imagine the Worst and Double It"
Just how will the sovereign debt crisis end?

By Bob Stokes
Fri, 15 Jun 2012 15:00:00 ET

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We've all heard the line: Let me give it to you straight.

And in speaking to his counterparts in Spain, an Irish economist did just that.

Ireland has this banking advice for Spain: imagine the worst and double it. [emphasis added]

Like Ireland, Spain sought a bank bailout after being felled by a real-estate crash. Now, just as the Irish did, the Spanish are awaiting the results of outside stress tests gauging the size of the hole in the banking system.

Bloomberg, June 14

Stress test or no, EWI's Global Market Perspective has known that Spain's banking system is frail. In May, the publication gave its subscribers this chart-supported insight:

A 17-year high in the percentage of non-performing Spanish loans is merely one illustration of the Continent’s illness. After falling to a four-decade low of less than 1% in 2007, delinquencies have spiked eightfold in the past five years. The percentage stands at its highest level since 1994.

Global Market Perspective, May 2012

By itself, a subsidiary of Spain's largest bank, Banco Santander, absorbed Q1 bad loan losses of 475-million euros.

Italy is in the same sinking economic boat. The June Global Market Perspective showed how much the eurozone's third largest economy is also drowning in bad debt.

The Italian and Spanish economies are in shambles as borrowing costs have skyrocketed for both countries.

But the recent spotlight has been on Greece. Now that the Greek election is over and voters appear ready to embrace austerity, should we be optimistic about the future of the euro zone?

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Tags: credit default swaps, deflation, European debt crisis, European Union (EU), eurozone, Greek debt, soverign debt crisis

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