First, the Spanic (for a panic in Spain). We’ve just seen one rescue package for the troubled Spanish banks. But who says 100 billion euros is enough? This is a country that is sliding into deep recession, and where the government is cutting spending fast — which is only going to deepen the recession. The economy is forecast to contract by 1.7% this year, and the actual outcome could be much worse. During a recession, businesses go broke, unemployment rises, and loans don’t get repaid because people don’t have any money. None of that is good for the banking system.
Worse, no one really knows precisely where the bailout money will come from, or how much is actually needed. One thing that can be said for certain about euro land, after two years of this crisis, is that everything is always worse than it looks at first sight. Nothing has really been done to make sure that Spain is on the path to recovery. If the rescue falls apart, however, and Spain has to come back for another package, then there will be a massive run on its financial system.
That will be the Spanic.
Next, a Quitaly (for Italy’s quitting). The Spanish bailout puts pressure immediately on Italy. The precise terms of the Spanish bailout have not been agreed yet, but the reports are that Spain’s banks are going to get funding at an interest rate of 3%. Italy’s banks, and the Italian government, have to pay 6%, if they can get funding at all. The Spanish money does not even come with very onerous conditions — at least no more onerous than the budget cuts already being imposed by the government.
Imagine how that is going to feel to the Italians. The Spanish get to borrow money at half what it costs them — and this at a time when very high borrowing cost are pushing your country into the fifth recession since the nation joined the single currency. Worse, Italy has to stump up around 22% of the Spanish rescue — borrowing money at 6% to give to its neighbors at 3%. That isn’t going to go down well. Inside Italy, pressure is inevitably going to grow for it to get the same terms — and if it doesn’t, it will threaten to quit the single currency, with all the chaos that could bring about.
Finally a Fixit (for a Finnish exit). The crisis will finally come to a head when one country decides to get out. Finland is the most likely. Why? Because it is a small nation with a strong economy. It is easy to head for the door. Finland would be better off on the first day, just as Estonia was when it decided to leave the ill-fated ruble zone created after the collapse of the old Soviet Union. It doesn’t particularly have to worry about the impact on the European Union, in the way that Germany would if it opted out. If a country such as that leaves, it is effectively game over, but no one can really say that of a tiny place such as Finland. And it has a strong anti-euro political grouping; the True Finns scored well in the last election and may well improve their position in the polls.
Finland is already demanding collateral for its portion of the Spanish loan. That could well turn into a deal-breaker — no collateral, so we’re out of here. Once one country leaves, it is much easier for the next to leave, in much the same way as it is easier to be the second person to leave a really bad party than the first.
A Finnish exit will be the trigger for the single currency to either be taken apart, or else for a smaller euro zone with fewer countries and tighter rules to be created. Either way, it would bring the crisis to a much-needed resolution.
Nothing about that process is likely to be smooth. And if it does play out like that then the only assets you want in your portfolio while it is happening are dollars and gold, and maybe a few Swiss francs as well. Everything else would sink to bargain-basement levels. But at least the whole sorry saga would be reaching its end.