Well that was fast. The Wall Street Journal reports that Italian bond yields are back up above the critical 7% threshhold where interest rates threaten the country's fiscal stability. But that's not even the worst news. The same blog post suggests that Spain may be the real problem. It cites Marc Chandler of Brown Brothers Harriman, who is . . . well, how do you say "bearish" in Spanish?
Spain, unlike Italy, has a housing and real estate bubble. The full magnitude of the cost of this is still unclear. Investors and policy makers have a greater sense of Italy's financial burdens than Spain's.
In the middle of December, for example, the Bank of Spain indicated that bad loans in the Spanish banking system were 7.4% of all loans. This is a 17-year high and is still rising. Property price and house prices do not appear to have bottomed, and the deterioration of the economy, which likely contracted in the second half of 2011 and appears poised to contract in the first half of 2012, warns of the downside risks.
The government fund for bank restructuring (FROB) has already injected 30 billion euros into the banks. The EBA says Spanish banks need to raise another 26 billion in capital in the first half of 2012. Spain's new Economics Minister has indicated that Spanish banks may put aside another 50 billion euros (~4% of GDP) aside for provisions for bad property loans.
Investors' focus has been on the challenges that Italy's largest banks face in raising capital. They have yet to turn the attention to Spanish banks capital needs. ...
Central banks have a pretty dim record defending their currencies from devaluation pressures. Now we have a new question: can they defend the sovereign debt that's issued in that currency? In theory, they ought to be able to: just keep buying. But the European Central Bank isn't buying directly; it's essentially giving European banks free money to buy European sovereign debt.