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Published: Sunday, 6/10/2012

Nation of concern

The latest country of concern in the euro zone is Spain, even though its fate so far is a problem primarily for the Europeans, not the United States.

Until now, European Union countries in the most trouble have been Cyprus, Greece, Ireland, and Portugal, with Italy and Spain waiting in the wings. Spain has now moved into the position of most worrisome of the 17-member group, given that the Spanish economy is the fourth largest in the euro zone.

Spain is in miserable shape. Total unemployment is near 25 percent. More than 50 percent of young Spaniards are unemployed.

Its banks are shaky, with portfolios full of bad mortgage and construction loans. The country has run a persistent deficit, made worse by regional governments that feel free to incur debt without reference to the central government, which nonetheless bears ultimate responsibility for it.

Because 20 percent of U.S. exports go to Europe, the continent's economic health is of concern to America. With the Spanish debt problem a part of that, Spain should be of only limited concern to the United States as well.

Last week, however, the Spanish government held a bond auction, offering $2.5 billion in 10-year instruments to help pay its bills. There was initial concern that the bonds wouldn't sell. They did sell, but at a high rate that is ultimately unsustainable for the Spanish economy. That puts payback in the hands of still-solvent but reluctant euro zone countries, led by Germany.

Unfortunately, U.S. banks bought some of the bonds, drawn by the attractive rate, pulling America into the fight. At the beginning of this year, JPMorgan Chase, Bank of America, and Goldman Sachs held $15.2 billion in Spanish debt. The estimate now is $47 billion.

The Spanish government is seeking at least $100 billion from other euro zone members to bail it out. Spanish banks want the funding to go to them, rather than to other sectors of the country's economy or the government.

The United States should try to stay clear of Spain's mess and not let itself be drawn into the quicksand by U.S. investors who speculate in Spanish bonds.

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