Well, it was only a matter of time before the zombie plague that is the European debt crisis once again lurched toward global markets, hungry for brains....brains...brains... I mean bailouts...bailouts...bailouts.... That's what Spain is now telegraphing, as the yield on the country's 10-year bond edged closer to the critical 7-percent mark, the point at which a bailout by European banking authorities would be necessary.
Spain's woes are very different from Greece's. Spain has a banking crisis that was brought on by a property boom. Greece borrowed to build a welfare state. For this reason, it's critically important that Spain's crisis be contained, because other banks have exposure to Spanish banks. Banks outside Spain.
Here's some insight from (of all places) Bermuda's Royal Gazette:
Spain’s mess is really the result of a bursting housing bubble. This was a significant bubble. According to Bank Credit Analyst Research, the Spanish and Irish housing booms eclipsed even the US surge. In ten years, US houses doubled, Spanish prices trebled and Irish prices quadrupled...Spain built one house for every additional person added to the population over the past two decades. They suggest that if wages in Spain fall to be more in line with Germany, Spanish house prices would need to fall 50 percent to be back to this pre-bubble relationship.
To make matters worse, Spain has unemployment over 20 percent and a huge gap between wages and housing prices. So the country is looking at, more or less, a total collapse in housing, which means that Spanish banks and their counterparties will have to deal with massive asset write-downs — while also struggling to provide financing for Spain's swelling debt.
If this sounds familiar, it should. This is similar to what happened in the U.S., with the exception that a lot of the Spanish housing boom was in second homes, rather than subprime mortgages. In the U.S. we had the Federal Reserve to step in a re-capitalize the banks. In Europe, the central banking apparatus is just learning how do to this.
Expect this situation to keep markets volatile all week, until — inevitably — the technocrats who are struggling to contain the crisis come up with yet another plan. Complicating matters, however, this time around are the simultaneous political struggles of French President Nicholas Sarkozy (who finished second to his socialist opponent in the first round of French elections on Sunday) and German Chancellor Angela Merkel, who's got her own problems at home. These two have been the conjoined political face of the eurozone rescue. But they both have pressing distractions at this point that may divert their attention from Spain. And whoever's next.