Well, we are now officially in the middle of a full-blown European debt crisis threatening to spread globally again.  All the more reason we might see further stimulus in the US sooner rather than later.

Ahead of a 2 billion Euro bond auction, Spanish yields soared after ratings agency Fitch downgraded Spanish debt in light of a failure of the ECB to properly handle the debt crisis and acknowledgement that the size of the bailout Spain actually needs is much higher than previously thought (now sitting at 100 billion Euros instead of 60).

Nevertheless, the bond auction of Spanish Treasuries was successful and helped buoy European stocks to end higher for the day.

Full-Blown Debt Crisis, Contagion Fears

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Aside from other banking problems (and negative yields on German bunds), just look at the Spanish yields.  The Spanish 10-yr bond yield has risen over 10% in just two months.  Two-year bond yields, however, have risen 25% since similar auctions in April.  4-yr note yields have risen a similar 24% in the same time period.

On Twitter, you can follow the crisis using the hashtag #spanic (Spanish panic), which itself is modeled after #grexit (Greece exit from Euro).

Fitch has issued a three-notch (!) downgrade apparently for an absence of ECB monetary policy vision and decision-making, which has led to the near-collapse of Spain’s sovereign wealth profile via capital flight from its banking system.  It was also announced that China’s biggest sovereign wealth fund, China Investment Corp., was cutting its exposure to Europe. Hardly surprising – China is fast cutting exposure to the USD as well.

Spanish banks are now the largest purchaser of Spanish debt (this should also recall for readers close parallels with the Fed, which is now the largest holder of US debt).  As the Telegraph notes, Spain’s debt has now dropped from A to BBB – a horrible affair leaving Europe’s fourth-largest economy sitting just above junk status.

All this notwithstanding, readers should still take note that Spain’s debt to GDP ratio is still only expected to reach 95% by 2015.  Dear readers, please note that the debt-to-GDP ratio of the US is already at 100%.  Keep things in perspective.  This is an interconnected global crisis.

What is worse, however, is that Fitch warns the rating could drop further if we see a #grexit or other erosion of the monetary union.  However, there is the growing possibility that Merkel will allow a central bank rescue of Spain.

Now more than ever in the past six months it seems it would be prudent to become a gold bug and buy gold for security in your portfolio.

Tagged as: banking, banks, bonds, collapse, crisis, debt, downgrade, ECB, Euro, euro crisis, europe, European banking, Eurozone, Fitch, Greece, grexit, headwinds, interest rates, ratings agencies, Spain, spanic, Treasury, yields