The Real Threat Is Spain, Not Greece: Sullivan

The greatest threat to the global economy has quickly shifted west to Spain. Spain’s stock market and big bank stocks continue to tumble. The benchmark IBEX 35 index is down 10 percent since Jan. 1 and nearly 30 percent over the past year.

The American Depository Receipts for Spain’s two biggest banks, Banco Santander  and BBVA have fallen 11.6 percent and 13.1 percent over the past four weeks respectively. Both stocks are now down more than 40 percent over the past year. Yields on 10-year Spanish bonds are close to yielding 6 percent, and the cost to insure Spanish debt is nearing a record high.

Here’s the fear: Banco Santander, BBVA and the third largest bank in Spain,La Caixa, have combined assets of about $2.7 trillion. Spain’s GDP is just about $1.4 trillion.

In other words: Spain’s three biggest banks are nearly twice as big as the entire Spanish economy.

By contrast, America’s three largest banks by assets — JPMorgan Chase,Bank of America and Citigroup — have combined assets of around $6 trillion, or about 40 percent of U.S. GDP. If JPMorgan, Bank of America and Citi  are too big and too systemically important to fail, what does that make Spain’s big three?

For this reason alone, Ben Bernanke and central bankers around Europe are right to be worried. Consider the difficulty the ECB, IMF and European Commission had in working out a bailout for Greece. Now multiply the economic problem a few times over and the scope of the growing Spanish crisis becomes clearer.

Spain’s economy is the 14th biggest in the world, nearly five times larger than Greece. Spain’s unemployment rate is a staggering 23 percent. That’s worse than the jobless rates in Mozambique, Micronesia or Equatorial Guinea and means there are nearly as many people without a job in Spain as there are working age people in Greece.

Spanish home prices continue to fall, corporate and personal bankruptcies are up, and Spain’s economy is contracting.

Put simply: Greece is papas pequenas (small potatoes) when compared to Spain. If Spain’s problems worsen and any of its big banks need a backstop or bailout, it is unclear where the money will come from. The bailout funds in Europe currently aren’t big enough to handle it and many I speak with aren’t optimistic the money could be easily raised.

One thing spooking markets Tuesday was a comment from the head of the Bank of Spain, who said if the economy contracts further than expected Spanish banks may need more capital.

Last week I wrote that $4 gasoline would not take down the macro American economy. It won’t, but given the interconnectedness of the global financial markets, one big, bad Spanish bank certainly could.

CNBC