After a one-day reprieve, and a big rally in the Dow, financial markets were backsliding again Wednesday amid ongoing concerns about Europe generally and Spain particularly.
In Europe, major bourses fell after separate reports showed weaker-than-expected construction data for the EU and Italy. U.S. stocks slid from the open and were lower in recent trading, albeit modestly, with weakness in tech giants IBM and Intel weighing on major averages.
Beyond the daily focus on the latest earnings and economic data, global investors are focused on prospects for a bailout of Spain, notwithstanding protests from EU and Spanish officials.
This week, Euro Group president and Luxembourg Prime Minister Jean-Claude Juncker declared "Spain is on track" and said he "does not think Spain will need any kind of external support."
German Finance Minister Wolfgang Schaeuble made similar comments and said its wrong to compare Spain with Greece or Portugal. "The fundamental data in Spain is not comparable to those in the countries that are under a program," he said, Reuters reports.
But the data, and the bond market, tell a different story.
Spanish bond yields remain above 6% and even Tuesday's "successful" bond auction came at much-higher yields vs. a year-ago.
Unlike Greece or Portugal, which suffered from massive deficit spending, Spain is reeling from the bursting of a housing bubble, which makes America's look tame by comparison.
Non-performing loans at Spanish banks hit 8.2% in February, the highest level since 1994, Bloomberg reports, citing Bank of Spain data. By comparison, non-performing loans at U.S. banks (defined as over 90-days past due) stood at 2.8% in the fourth quarter and fell steadily from 3.3% at the start of 2011, according to the St. Louis Fed.
In March, Spanish banks tapped the European Central Bank's special lending facility for around $411 billion in loans, a record amount in the short history of the ECB's Long Term Refinancing Operation (LTRO) and double the level from February.
The good news is the ECB has put this program in place. Along with the European Financial Stability Facility (EFSF), the LTRO should provide a cushion for Spain to put budget reforms in place. In addition, Spain has already pre-funded about 50% of its debt rollovers for 2012.
The bad news is that it's hard to imagine a scenario where Spanish banks won't eventually need a bailout. Unemployment in Spain is nearly 25% and austerity measures are likely to result in less economic activity, at least in the short-term, which means more loans going bad and more pressure on bank balance sheets.
The really bad news is markets are already looking beyond Spain to prospects for a bailout of Italy, which is one of the world's-largest economies and has a GDP 50% larger than Spain's. If and when the time comes to rescue Italy, discussions about the sustainability of the euro and the EU "grand experiment" will move from the realm of theoretical to acute reality, as Henry and I discuss in the accompanying video.