Danke schön, Angela Merkel, you have brought Europe to its AIG moment. If Iceland is Bear Stearns and Greece is Lehman Brothers, Spain — Europe’s fourth-largest economy, is AIG — too big to fail because its economy is so large and the tentacles of its banks so entwined with those of other huge lending institutions around the globe.
On Friday, this reality, if not the exact analogy, became crystal-clear to investors around the world. As the bank run on Spanish deposits accelerated, rates on sovereign debt in Japan, Germany, the UK and here reached panic levels; stock-market gains for the year were erased here at home; and investors flocked to gold in a world where paper money yielding 1 percent doesn’t look very safe anymore. And what did the German chancellor do? She met with Russian President Vladimir Putin to promote democracy in Russia! Say what?
So how bad is the pain in Spain? Well, consider these numbers: Unemployment is running at 25 percent, with youth unemployment at 40 percent. Tax revenues are plunging, with VAT (value-added tax) receipts, the best proxy for consumer spending, down a remarkable 15 percent from a year ago.
At a 10-year interest rate of 6.8 percent, Spanish debt is effectively shut out of the global capital markets. Sounds like a recipe for depression, and if Spain isn’t already in one, it is certainly in a deflationary death spiral. Little wonder deposits are fleeing the peninsula by the minute.
Sure, there will likely be conference calls and stopgap measures.
But with Spain on the brink, Europe is in the same position the US was on the evening of Sept. 16, 2008, one day after the failure of Lehman Brothers. That night, Ben Bernanke and Hank Paulson “saved” AIG with an initial $85 billion dollar loan.
So into the EU leadership vacuum now come the nightmare scenarios. If Spain doesn’t get a massive bailout — and soon — there is the growing possibility that Spain, not Greece, will be the first to exit the euro and return to its former currency.
Under such an Argentina-like model, Spanish debts would be repaid in much less-valuable pesetas, setting off the mother of all contagions across the global banking system.
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