Overview of countries effected by credit, liquidity and inflation; recession conditions – Japan, Spain, Iceland – (update 3)

Overview of countries effected by credit, liquidity and inflation; recession conditions – Japan, Spain, Iceland – (update 3)

Spain with it’s extraordinarily over inflated property market and a reported 130% of household debt eating up any disposable income, combined with inflation, that erodes anything left. Overextended their mortgage market, encouraging it’s banking sector to create a frenzy of funding from selling MBS or bonds connected with a booming property market.

With the credit crisis yet to claim a European country (Italy was a basket case, even with the global boom!’) as a victim (now consensus acknowledges the US is in recession, note IMF and G7 saying words like ‘mild’ recession and ‘sharp slow down’ and the like); the rest of the world continues to face inflation and deleveraging in rapid and worrying manner.

The European Central Bank will possibly cut rates very soon in 2008, which will do little to resurrect Spain’s interbank funding problems from the global liquidity crisis, as long as the Euribor rates stay high; the ECB will be reluctant to keep purchasing mortgage junk from Spanish banks. A Spanish bank will go under, with the beginning of a all out property crash in Spain in 2008.

But, like the US and possibly Singapore. Spain will be introducing a ‘stimulus package’ for the economy,

from Timesonline.com,

“The Spanish Government has announced plans to spend €10 billion (£8 billion) a year in an economic stimulus package intended to soften the blow of a looming housing crisis.”

This stimulus package would be more on par with political motivation than economical.

With a banking sector that relied on a mortgage market for funding, it would be interesting how illiquid the Spanish banks are, although Timesonline.com reports;

“The Government also points out – and analysts mostly agree – that the country’s financial system is solid. Spanish banks are large, well capitalized and, because of close oversight by the country’s central bank, largely avoided stuffing themselves with bad-quality debt or off-balance “special purpose vehicles”.

I wonder how correct that assumption is on Spanish banks?