The Spain Downgrade and Contagion: Just How Much Risk?

Home > European Markets
The Spain Downgrade and Contagion: Just How Much Risk?
Has the threat ratcheted up a notch (or two)?

By Bob Stokes
Fri, 27 Apr 2012 16:00:00 ET

Get investable insights sent to your inbox at least once a week – for free. Challenge the way you think about investing with The EWI Independent.

Privacy

A few months ago, Europe's sovereign debt crisis all but disappeared from the financial headlines.

Financial journalists and many of the economists they interview were busy talking about rising markets and recovering economies. Some were even saying that Europe's debt crisis was "under control."

It seems not.

Standard & Poor's on Thursday cut its credit rating on Spain by two notches, citing expectations the government finances will deteriorate even more than previously thought as a result of a contracting economy and an ailing banking sector.

Reuters, April 26

The downgrade took Spain from A to BBB-plus. S&P also put a negative outlook on the country's credit. In the first quarter, Spain's unemployment rate was 24 percent. The nation's foreign minister said (4/27) that Spain's economy faces a "crisis of huge proportions."

Now, of course, the financial press is all over the story.

But for months and even years, we've been saying to subscribers that rescue packages are destined to fail.

Shortly after the fourteenth European debt crisis summit concluded and there was an "extraordinary shift from negativity to optimism," the November 2011 Global Market Perspective flatly said "The current level of unpayable debt is too big to bail."

Even as optimism continued to rule in the wake of the second Greek bailout, the April Global Market Perspective stated

According to the eurocrats, Europe's debt problem is solved...confidence expresses itself in the form of new loans and political arrangements...the "dream" of a united Europe... was consummated at the end of the Great Bull Market in 1999. The tide of unity has been subtly receding ever since.

Fast forward to the April 25 Short Term Update, which published the day before the Spain downgrade:

Today it was announced that the U.K. economy has slipped into its first double-dip recession since the 1970s...Greece is bankrupt, Portugal is bankrupt, Spain is rapidly moving toward bankruptcy and the Italian economy is in shambles.

The April 25 Short Term Update continues:

France is on the verge of electing a socialist as president who just announced that he will reject the latest agreement by 17 euro-area leaders for tighter budgets. Europe is in shambles because there is too much credit and not enough income to service it, still...the solution -- more debt piled on top of the old debt -- is the problem. The U.S. seems immune, but it is not.

What is our view on the risk of contagion as one European domino after another falls?

One thing's for sure, if you wait on the financial media to alert you, you'll likely find yourself woefully behind the eight-ball.

Turn to our comprehensive Global Market Perspective>>

50+ Pages, 40+ World Markets, One Source: EWI's Monthly Global Market Perspective

Investors have more options than ever before. Markets that were previously exclusive to institutional investors are now within the reach of the average investor thanks to ETFs.

The problem is not how to get exposure to a market but which markets offer the biggest opportunities and which pose the greatest dangers. Once reserved only for professionals, the compreshensive Global Market Perspective puts the entire team of EWI analysts to work for you.

With 40+ markets covered and 60+ charts, it serves as your roadmap to global investment opportunity. Each issue is the culmination of more than 1,000 hours of research, so you can be confident every chart, every insight, every word has been meticulously vetted.

Learn more about Global Market Perspective now >>

Tags: debt downgrade, European debt crisis, european markets, European Union (EU), eurozone, Greek debt, International Monetary Fund (IMF), Short Term Update, soverign debt crisis

July 10-13

Freedom Fest Conference

Get an Unconventional Yet Accessible Look at European Markets

The European Financial Forecast gives you an invaluable big-picture outlook for major European bourses to give you an edge over the investing herd.

Each monthly 10-page issue gives you timely, Elliott wave analysis and forecasts of the DAX, FTSE, CAC, Euro Stoxx 50 and more, plus commentary on economic and social trends.

Preview the Latest European Financial Forecast Now>>

Most Read

Highest Rated

Free Report

The European Debt Crisis

The European Debt Crisis is affecting investments across the globe. Our new free report offers commentary from February 2010 through November 2011 that will help you to better understand what could be in store in the coming months and years.
Download your FREE report now.

European Markets

CLOSE [ X ]

The Elliott Wave Principle is a detailed description of how financial markets behave. The description reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific Elliott wave patterns in price movements. Each pattern has implications regarding the position of the market within its overall progression, past, present and future. The purpose of Elliott Wave International’s market-oriented publications is to outline the progress of markets in terms of the Wave Principle and to educate interested parties in the successful application of the Wave Principle. While a course of conduct regarding investments can be formulated from such application of the Wave Principle, at no time will Elliott Wave International make specific recommendations for any specific person, and at no time may a reader, caller or viewer be justified in inferring that any such advice is intended. Investing carries risk of losses, and trading futures or options is especially risky because these instruments are highly leveraged, and traders can lose more than their initial margin funds. Information provided by Elliott Wave International is expressed in good faith, but it is not guaranteed. The market service that never makes mistakes does not exist. Long-term success trading or investing in the markets demands recognition of the fact that error and uncertainty are part of any effort to assess future probabilities. Please ask your broker or your advisor to explain all risks to you before making any trading and investing decisions.