4 Key Events in Spain to Watch this Week

2012 has been the year of Spain, and I’m not talking about their dominating the Euro Soccer Tournament earlier this summer. I’m talking about concerns regarding the Spanish banks that ignited this latest round of the European crisis starting back in March, ending with a 100-billion-euro bailout from the rest Europe in June.

For most of the summer things have been relatively quiet in Spain, but this week that changes. This is a pivotal week for Spain and Europe as Spain can provide much needed clarity to the markets in several key areas of concern.

Don’t let the market’s recent low volumes and volatility fool you. Spain is still the center of the European crisis, and has the ability to send risk assets around the world falling should it disappoint this week.

There are four key events between now and Friday:

#1 — Spain will release its 2013 budget

The key to watch here is the deficit ratio, which is the ratio of a country’s debt to its GDP. A significant upward revision will be bad, as it will signal Spain’s fiscal situation is worse than feared, and the ultimate size of a European bailout might be bigger than generally expected right now.

Click the chart for a larger view.

#2 — Spain will release its financial reform plan

In concert with the budget, Spain will detail budget cuts and austerity measures designed to right the fiscal ship.

#3 — Spanish bank audit will be released

Currently, the market expects a capital short fall of around 60 billion euros, although most (including me) think that number will grow to between 70-80 billion euros. If it’s higher than that, it’ll be a negative for the markets.

#4 — Possible downgrade

What comes out of Spain this week could affect markets around the globe.

There is concern that Moody’s will downgrade Spain below investment grade. Moody’s said they would complete their review of Spain by the end of September, so we’re getting close. If something happens, most likely it’ll come this Friday.

Finally, the question on everyone’s mind is whether the Spanish government will formally ask for a bailout and get access to the new OMT (the latest bailout fund unveiled by the ECB in early September). Reports last week from the Financial Times and Reuters suggested that negotiations were ongoing and a formal request for aid would probably come this week. So if there isn’t a request, I think that might weigh on stocks.

The fear is that Spanish PM Rajoy waits until mid-October to request aid so his party won’t have that stigma in the October 21 elections. The problem with that is the markets will have to live the uncertainty for the next three weeks, which could act as a headwind.

Bottom line: If Spain doesn’t provide badly needed clarity to the rest of Europe and the markets, it has the potential to re-ignite fears about a Spanish and Italian default. However if Spain does provide the clarity the markets crave, you’ll see a big jump in Spanish stocks.

And one way you could profit from that jump is through the iShares MSCI Spain Index (EWP). This exchange traded fund is meant to track the Spanish stock market.

No one knows how the events in Spain will end up. But until it truly begins to right its fiscal ship, it remains at the very core of the European crisis, and will continue to be the main driver in global stock markets.

Best,

Tom