Spanish bulls' final run

(subheading)The German public is running out of patience for seemingly endless bailouts (subheading end)

 

Recently the European Union's bailout fund for banks, the European Financial Security Facility (EFSF), agreed to send EUR100 billion (EUR30 billion from Germany) to prop up faltering Spanish banks. Spain agreed to another painful round of austerity measures in order to receive the aid. It was backed by the German parliament, which signed off on the deal last week. Before the ink had dried though, investors' wobbly confidence in Spanish banks sent Spain's borrowing rate above 7%. This is generally considered the maximum rate that can reasonably be paid back by borrowing countries without causing irrevocable damage to their economies.

Some bullish investors have been spooked, and the bears are on the prowl. Things look quite bleak on the financial horizon for Spain in the coming months, perhaps even years. Its economy is service-oriented (tourism) and housing-based, with too little diversity. And to make matters worse, there is little demand for either. The situation has become so dire in Spain that some are even suggesting that violent social upheaval may take place. This could make the earlier turmoil in Greece seem tame.

Few politicians hold out hope that this latest bailout will be the one to stem the tide of financial red ink, and many experts believe that it is only a matter of time before the requests for a lifeline to the PIIGS (Portugal, Italy, Ireland, Greece and Spain) increase and the time between those requests become shorter. However, the spigot for bailouts is slowing to a trickle. From the perspective of the German public, the majority of whom are uncharachteristically in agreement, it appears as if good money has been thrown after bad with each new rescue.

The balancing act for Chancellor Angela Merkel's CDU, as well as  their coalition partners CSU and FDP, is to figure out how long bailouts can remain a politically viable option. By keeping these weaker economies afloat, she helps the German economy continue to sell its goods to fellow Europeans. Nevertheless, both the political and financial cost is massive. Despite Ms. Merkel's popularity at home, she cannot expect the German media and public to continue to give her a carte blanche when it comes to the hemorrhaging of hard-earned German cash to the economies of the PIIGS.

Most Germans, and many Europeans, believe that the cash-strapped banks in the PIIGS countries have reached this point by reckless investments, inflated balance sheets and general mismanagement. As a result, austerity is their just reward. Perhaps the biggest question in most of Europe's collective mind is: Who will crack first? Lending countries or borrowing ones? Whichever it is, one thing is certain. The bulls have been dragged from the ring.


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