For Europe’s Future, Spain Is All That Matters

Another great analysis from Gonzalo Lira. Excerpts:

If I had to bet on which country will bring about the end of the Euro—and perhaps even the end of the European Union—I’d have to say it’s Spain.

Right now, no one is talking about Spain—Spanish spreads are as quiet as a guilty man in a police line-up—everyone’s too concerned over Ireland, and the upcoming Portuguese Situation.

But Spain is the key—Spain is what you should be paying attention to, if you want to find out what will happen to the European Monetary Union (EMU), and the European Union (EU) itself.
And:
According to IMF numbers for 2009, the gross domestic product of Greece was $331 billion, Ireland was $221 billion, and Portugal was $233 billion—

—but Spain’s GDP in 2009 was $1.468 trillion. Roughly twice Greece, Ireland and Portugal combined. In other words, close to half of Germany’s GDP.
And:
Therefore, to bail out Spain, and plug up its fiscal balance sheet hole over the next three years would cost €450 billion—minimum. That’s about $600 billion.

Look at that number again—look at it closely, and take your time:

€450 billion.(600 billion US)

That’s twice the size of Ireland’s total GDP for 2009.

In order to figure out how much each party would have to shoulder of this €450 billion price tag, Bruce Krasting, in some private e-mail exchanges, thought that the percentages that the EU, the ECB and the IMF were shouldering for the Greek and Irish bailouts could serve as a template.

Fair enough: If we go by Greek and Irish percentages, then roughly a third of that €450 billion price tag to bail out Spain would be shouldered by the IMF—and as everyone knows, the U.S. puts up 20% of IMF money.

So the U.S. would be on the line for €30 billion—$40 billion—to save Spain.

Then Bruce delivered his verdict: “The U.S. is going to say ‘Yes’ to that and ‘No’ to California? No way. Not going to happen with this new Congress."
And:
Therefore, the IMF’s participation in a Spanish bail-out will be severely reduced, if not marginal. Therefore, bailing out Spain will be a strictly European affair.

Does Europe have €450 billion to bail out Spain? That is, does Germany have €450 billion to bail out Spain?

No it does not. It does not have the money for such a bailout—and even if it did, it does not have the political will to push through such a bailout.

Period.
And Finally:
Best case?

Though they remain in the European Union, the weaker economies exit the EMU and go back to local currencies, which they quickly depreciate, while their Euro-denominated sovereign debts are restructured and paid off over time. The Euro becomes the currency of France, Germany, Holland, Finland and Austria.

Worst case?

I can imagine a number of worst cases, all of them different, except for one thing in common: They’ll all be bad.