Deepening Spanish debt crisis sends shockwaves globally

A Spanish sovereign bailout would clearly be a key "game changer" with profound implications for the financial markets and the global economy, a Kingdom-based analyst warned as Europe's debt crisis returned to haunt global markets yesterday.
"It would necessitate a dramatic escalation in the EU's efforts to contain the crisis," said Jarmo T. Kotilaine, chief economist at the National Commercial Bank.
The Saudi stock market also declined with the Tadawul All-Share Index (TASI) falling by 0.88 percent to 6,641.10 points as petrochemical stocks came under selling pressure.
Fear over European debt surged yesterday and drove stocks sharply lower around the world. The Dow Jones Industrial Average plunged more than 220 points in early trading and the French stock market fell 3.13 percent in mid-afternoon trade.
The euro hit a 12-year low against the yen and Spanish borrowing costs reached record highs yesterday on speculation Spain could soon require a full state bailout.
Kotilaine said: "Spain is not a small peripheral economy but one of the four largest countries in the euro zone. This would potentially sharply push up the cost of the ongoing firefighting and would amplify fears of contagion, most notably in the case of Italy."
He said the ability of the current crisis management facilities would then be called into question, which would in turn fuel concern about political risk: The ability and willingness of political leaders to handle the crisis swiftly and credibly enough. This would massively increase market uncertainty and risk premia. It would also renew demand erosion concerns with respect to oil and other commodities and put downward pressure on prices.
Basil Al-Ghalayini, CEO of BMG Financial Group, said: "In the past, sovereign debt used to be classified as risk free return. Nowadays, it is becoming a return free risk. Hence, investors are getting very concerned and alert when a debt crisis deepens in an economy such as Spain which is sending shocking waves across the euro zone. Considering that some Saudi leading listed companies are connected either directly or indirectly to the euro zone economies, this level of debt crisis may have its impact on the trading patterns of investors in the Saudi stock market."
For the GCC markets, Kotilaine said this would revive concerns about sectors such as petrochemicals and banking. The longer-term impact would be determined by the global policy response to a major qualitative deterioration of the crisis. In that case, I suspect we would be looking at renewed quantitative easing and other unconventional monetary measures.
"If any of this is to have a positive impact on the GCC region, it might come from the growing perception of the region as a whole, and especially the hydrogen-rich, economies as international safe havens. Dubai and Bahrain are the most vulnerable to an increase in market risk. But even there, the situation has improved significantly in recent months," Kotilaine added.
Farouk Miah, head of equity research at NCB Capital, said: "Continued concerns that Spain will follow in the footsteps of Greece by requiring further funds led to weakness in European markets and spilled over into the Saudi market. The concern is of course that any economic recovery in Europe is still not visible, and this will lead to pricing pressure for oil and lower demand, thus directly impacting the Saudi economy." Additionally, Miah said: "Given it is Ramadan, there is significantly lower volumes in the Saudi market with some retail investors exiting the market to free up funds to spend during Ramadan. This is also putting pressure on the TASI.