Is Spain Sweating About it Financial Future?

Rain starts falling on Spain as questions and concerns swirl around the weekend’s Spanish bank rescue.

Markets soared in a moment of short lived euphoria over the announcement that Spain was going to get international help for its failing banks, but by Monday morning, the hangover was already starting to settle in.

Asian markets jumped with the Nikkei jumping 1.96% and the Hang Seng up 2.4%.

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European markets jumped, as well, but came off early highs as concern grew over the details of the bailout and the future of Europe as the Greek elections this weekend rapidly approach.

U.S. markets opened higher but then quickly faded as market participants realized that the “fix” didn’t fix anything.

Specifically, the problems surrounding the bailout lie in where the money will come from and what the additional aid will do to Spain’s already bloated national debt.  So far it looks like the bank bailout will come from the European Financial Stability Fund (EFSF) which means that this could look a lot like the Greek rescue in which private bondholders took significant “haircuts” on their holdings.  There’s also talk of using the European Stability Facility which has one problem in that Germany has not yet ratified it.  Furthermore, Spain is still apparently on the hook for this loan/credit line and so that can only impact its long term debt and refinancing problems.

So the Spanish rescue appears to be either unfunded or from a temporary funding source.  To make matters more interesting, Finland says they’re not pitching in without collateral to back up their money going through the EFSF.

Bond markets don’t like the whole thing as Spanish 10 year yields rose on Monday to the 6.5% level, closing in on the “unsustainable” 7% and Italy’s joined the party with their 10 year bond yield spiking to 6.03% on Monday morning.

The Eurodollar (NYSEARCA:FXE) lost ground, down 0.16% and trading at $124.97

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Nervousness was also apparent in the credit default swap market as Spanish CDS jumped to near record prices and Italian CDS rose.

Like a roving pack of dogs, global financial players are now already turning to Italy and its problems and with Italy being 8th largest economy in the world, the global debt storm just keeps on growing.

Morning markets look like this approaching lunch hour in New York:

iShares MSCI Spain ETF: (NYSEARCA:EWP) -0.90%

iShares MSCI Italy ETF: (NYSEARCA:EWI) -3.3%

Vanguard Europe ETF (NYSEARCA:VGK) -0.50%

Currency Shares Euro Trust (NYSEARCA:FXE) +0.01%

Bottom line:  Global stress grows as the Greek election approaches and market participants realize the extent of the fiscal problems in Europe.  Italy waits in the wings and European leaders have been still unable to get in front of this fast moving crisis.  Expect more volatility ahead.

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