Global Investors Eye Safety as Spain Remains Scary

Spain craters global markets as traders head into holiday weekend.

News for Spain worsened today and sent ripples across world financial markets as Bankia, the large, recently nationalized Spanish bank, needs $23 Billion from the government and a large Spanish region, Catalonia, says it might need help, too.

Here’s a summary of late breaking events:

1. Bankia trading was suspended as the company had its credit rating slashed to  junk status by S&P ratings.  Bankia was joined in the S&P cuts by Banco Poular Espanol and Bankinter in the downgrades.

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2. Bankia is asking for $23 billion from the Spanish government to help it recapitalize from damaged done by its real estate loan portfolio.  The troubled bank’s shares are down some 60% so far for 2012.

3. Spain’s stock market continues deeper into bear market territory on the back of recent developments and the country’s ETF index, iShares MSCI Spain Index (NYSEARCA:EWP) declined 0.17% on Friday and is now down more than 10% since the beginning of May.

4. Spanish bond yields continue climbing, up to 6.32% today, and now approach the widely considered “unsustainable” level of 7% as bond investors demand higher premiums for what looks like an increasingly risky investment.

5. One of Spain’s major region, Catalonia, says it might need government help to make its debt obligations.

6. The Eurodollar (NYSEARCA:FXE) continues its decline, own 0.81% today to trade at $125.17, a level last seen in July, 2010.

7. Charles Dallara, director of the Institute of International Finance, says that a Greek exit from the Eurodollar could cost more than $1.25 Trillion and that the European Central Bank has only half the capital required to cover its exposure to Greek liability.  If Greece were to exit the Euro, Mr. Dallara says that the European Central Bank would be insolvent.

Europe ETFs felt the results of today’s news as iShares MSCI Spain ETF (NYSEARCA:EWP) declined 0.17% and CurrencyShares EuroTrust (NYSEARCA:FXE) declined 0.16%.

In the United States, the ripples were also felt as the Dow Jones Industrial Average (NYSEARCA:DIA) declined 76 points, 0.76%, the S&P 500 (NYSEARCA:SPY) gave up 0.2%, U.S. 30 Year Treasury Bonds (NYSEARCA:TLT) gained 0.27% and the U.S. Dollar (NYSEARCA:UUP) added 0.31% as capital flowed away from risk assets to the perceived safety of U.S. backed financial assets.  The Nasdaq 100 (NYSEARCA:QQQ) declined by 0.17%.

Bottom line: Before the Greek crisis has even been resolved, Spain heats up as the next major trouble spot.  The only problem here is that Greece is a mosquito, #35 largest GDP in the world with $303 Billion, while Spain is #12 in the world with $1.5 Trillion GDP.  If Greece leaving the Euro could cause the European Central Bank to go insolvent, one can only imagine what the outcome of similar problems in Spain might be.

Disclosure: John Nyaradi’s ETF Premium actively trades a wide range of ETFs and positions can change at any time.  ETF Premium has a position in iShares 20+ Year Treasury ETF (NYSEARCA:TLT)

John Nyaradi is the author of The ETF Investing Premium Newsletter.