Will Spain Default Now?

By Kevin McElroy

NEW YORK ( TheStreet) -- Ask anyone on the street if Europe is in trouble, and they'll say "yes!"

But ask them exactly why, and exactly how much trouble?

They might answer, "Because of debt problems...and I'm not sure."

That's about the most information you'll get from any mainstream media source. Most news stories about European debt problems will mention the problem, and then immediately quote a bunch of European central bankers and politicians about who's to blame, and/or why it's not really that big of a deal.

For instance , this story about the "Euro Crisis" in the Wall Street Journal today doesn't give any specific information about which European countries owe what to whom.

For the record, I believe Europe is indeed in trouble. I think the actual, specific, verifiable numbers tell more of a tale than any politician or banker can -- because what the numbers tell us is that countries like Spain, Portugal, Italy and Ireland are broke. They'll either have to default on their sovereign debt obligations, or Europe as a whole will have to crank the Euro-printing press to create money out of thin air to pay for those obligations.

Today I'll focus on Spain. They're as close to insolvency as any country, and the numbers tell us why.

In 2011, Spain has to roll over Eur150 billion of debt -- but Spain's GDP is only Eur1.051 trillion.

To put that Eur50 billion in perspective, that's over Eur6,500 per every member of the Spanish work force. Or about Eur15 of every Eur100 of Spanish production.

That's also above and beyond conservative estimates of a budget deficit of Eur94.5 billion in 2011.

Oh, I almost forgot: the banking sector in Spain is still unraveling. Moody's predicts that in the best-case scenario, Spanish banks or "cajas" will need an additional Eur25 billion in bailout funds.

Moody's worst-case scenario predicts that Spanish banks will require an additional Eur90 billion.

Right now, Spanish "cajas" are in the process of merging together. Officials believe that lumping cajas together into bigger institutions will make them more solvent. But as we all know, bigger piles of debt aren't inherently safer. In fact, I'd argue that combining strong banks with weak ones is the exact opposite of what Spain should do if it wants the situation to get better.

It's like Spain looked at their failing cajas, and seeing that they are, indeed, small enough to fail, decided that the solution was to make them merge together with other cajas, to create bigger institutions that would be too big to fail. By now, we all realize that "too big to fail" is at best a political slogan that gives government permission to bail out any politically expedient or important business or sector. At worse it's a logical fallacy that's tying an anchor around the throats of responsible businesses and citizens.

Here's what should happen: weak banks should go under and take all bad inventory with them. Any salvageable portions of those weak banks will get scooped up by the solvent ones.

That's how bankruptcy works.

Casting the lots of the solvent banks with the insolvent banks is bad news for the whole banking industry. Bailing out those banks with public funds just compounds the problem. Instead of being an isolated, compartmentalized default, Spain, and Europe central bankers are turning the risk into a widespread phenomenon. They're betting the entire solvency of Europe and the very existence of the Euro on the idea that maybe, just maybe, they can paper this problem over.

If they're wrong, everyone loses -- not just a handful of bad banks in Spain.