What Does Spain's Bailout Mean for Energy?


"When a recovery emerges, the energy sector tends to move up quicker than the market as a whole. That, combined with a strengthened euro, will further bolster energy."

Over the weekend, Madrid finally conveyed just how much it needs from Eurozone officials in terms of a bailout.

Of course, the final amount will not be known until a third-party assessment of the Spanish banking system is completed.

But we can estimate that it will be at least 100 billion (B) euros ($125B), and possibly as much as €150B. Spain will be the fourth country to receive European Union (EU) support—lining up after Greece, Portugal and Ireland—and push the combined bailout totals to more than €500B.

It is now obvious that the Spanish banking system cannot survive much longer on its own. Interbank fund availability has ceased, and the nation would soon effectively cut all credit availability altogether.

According to continental media reports, based on the ever-present "unnamed sources close to the decision," it was a contentious round of negotiations. Seventeen finance ministers on a single conference call Saturday negotiated the agreement.

This reminds me of my undergraduate days and the creative ways we had to save money in Europe. Then, the old analog telephone systems would allow many people to call the same number, be placed on the same "busy signal," and then talk to each other for free. The problem was, the more callers, the more difficult is was to say or hear anything.

And none of us was a finance minister or had a central government pressuring us from above.

In the current European example of cellular conferencing, there two major stumbling blocks appeared. One was a continuing German reluctance to commit additional funding and a stronger opposition to EU-supported eurobonds. The other was the position of the International Monetary Fund (IMF) in all of this.

As it turns out, the IMF will have a secondary role.

Some EU members would prefer that the IMF have a more active funding role. But the main members of the Eurozone (read: Berlin, Paris and a weakened Rome here) wanted as little international influence as possible in what they still see as a continental problem.

Of course, floating Eurobonds would ultimately provide such pressure to non-European financial powers such as China, Russia and the U.S. anyway. This has been one of the main arguments from the beginning against leveraging the debt problem by floating paper.

That may have to come eventually, and in a more structured way than some of the present IOUs between central banks. If that discussion begins in earnest, it would initiate a major political firestorm. We are not there yet, but it is never far from view.

The Spanish bailout will buy some time. Unfortunately, with the next Greek election set for next Sunday (June 17), the reprieve may not last long. If Greek voters do not resolve the current political impasse by allowing a government able to push financial austerity further, the Spanish bailout becomes only the first tidal wall against a more dangerous situation.

Greece would become the first nation, but probably not the last, to be leaving a disintegrating Euro Zone. Such an eventuality would guarantee a deepening European-wide recession.

However, the short-term results of the Spanish bailout accord will improve stock market prospects on both sides of the Atlantic, as well as strengthen the euro a bit.

Well, at least for a week or so. . .

The Rush to Offset a European Meltdown

What Brussels must do now—providing a series of bailouts—is the only real option. This is one of the functions expected of a common currency. To offset a genuine economic meltdown, a lender of last resort is required. Otherwise, cross-owed debt brings down the market like a millstone around its neck.

That was always one of the primary selling points of using the common euro, by the way. It allowed a balancing of the strengths and weaknesses of a broader, more integrated market. It allows for a seamless connection of banks and financial markets across borders.

These days, we are seeing the clear downside of that structure.

On the other hand, without the euro, Europe as we have come to know it would not survive. And that collapse would adversely impact investment prospects on a global basis.

The stakes, therefore, are greater than the frustration Germans have with Greeks or the tensions Frenchmen have with Italians. More than 80% of the citizens in Europe's most vulnerable southern tier economies (Greece, Italy and Spain) want to remain in the Euro Zone despite their hatred of austerity measures and dislike for their own politicians.

They clearly recognize that their condition under the current crisis is difficult, but, without the common currency, conditions would be much worse.

Without the euro, they would continue to have local inept financial and political systems, along with powerless leaders, but no Brussels to fall back upon.

For the next week, we're likely to see a continuing recovery in the markets, perhaps becoming more tepid as the week comes to a close (and the next Greek election draws closer to center stage).

That's good news for energy investors like us. The partial relief experienced by Europe and the euro following the Spanish agreement will improve our energy holdings as well.

As I have mentioned on a number of occasions over the past two months, the energy sector has been hit harder than other market segments while the downward pressures caused by the European mess intensified.

However, as we witnessed last week, when a recovery emerges, the energy sector tends to move up quicker than the market as a whole. That, combined with a strengthened euro, will further bolster energy.

We should get used to taking this a week at time.

Kent Moors
Oil & Energy Investor

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