Fears of European crisis way overblown

Good morning everyone!

For today’s post I wanted to highlight for you why I feel that current investor fears about a collapse of the European economy are way overblown.

As far as I can tell most of the fears are sourced in a fear that Spain will be the next Greece.  The market rumor mill which is so powerful and so silly is full of news that a Spanish official has suggested that Spain is negotiating for a $335 billion credit line with the IMF.  What is unclear is why Spain would be doing this since it has access to more capital from the emergency bailout funds promised by the EU itself.  Hmmm.

Let’s compare and contrast Greece and Spain…

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Greek banks are in trouble both domestically and internationally.  This is because Greek banks lent huge amounts of capital to fellow Balkan countries during the real estate bubble.  So Greek banks are exposed not just to the decline in property values in Greece, but also countries like Macedonia, Serbia, etc.

Spanish lending was done overwhelmingly in Spain alone.

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Greece’s public debt is one of the highest in the world coming in at a whopping 120% of its Gross Domestic Product.

Spain’s public debt is only 52% of GDP.

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Greece’s willingness to face the fire of their lies about their budget deficit and debt problems came only after embarrassing discoveries and realizations by others.  Even in the face of a Super Crisis unfolding the nation was reluctant to enact austerity measures to manage their own financial house.

Spain is confronting its economic problems in an upfront, proactive manner.  A powerful example of this is that Spain has announced that it is undergoing vigorous financial stress tests of its banks and that it will soon reveal the results of those tests.

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Greece has no strong private financial institutions.

Spain has both Banco Santander and BBVA.  Both of these institutions are considered among the best in the world.  The strength of these banks will be obvious once any Spanish bank fails and they swoop in and buy the assets of their collapsed competitors.  That vulture capitalist behavior will make Santander and BBVA more solvent.

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It’s not that Spain doesn’t have problems to worry about – because it does – it’s that Spain is soooo far away from being “the next Greece” that it is practically laughable.  How can you laugh all the way to the bank?

Any weakness in financial markets attributed to fears about Spain should be seen as buying opportunities.  One of the easy ways to make money as an investor is to recognize when there is disconnect between financial market pricing and reality.  Reality says that everything should be fine.  Financial market performance does not reflect that reality.

Jason