Felix Zulauf interview part 2: Greece is heading to the exit, Spain might withdraw from the euro zone in 2013

The financial market expert Felix Zulauf expressed his opinion in an interview for Wirtschaftswoche Online that Greece is not the only problem in the EU, but merely the beginning of the real problems. He expects the southern-European country to be the first to leave the Union, followed by Portugal, Ireland and Spain.

Is Greece heading back into bankruptcy?

The mood has changed. And I'm assuming that Greece will become insolvent for the second time later this year.

Are we just beginning a phase of state bankruptcies and exits from the monetary union?

Yes, this process is far from over. Greece alone would still not be a problem for Europe and the euro zone, but it is only the beginning of a problem that is expanding massively below the surface. Greece will probably be the first country to leave the euro zone. The next year Greece will be followed by other countries, probably Portugal and Ireland at first, but then comes Spain. The question is whether the euro zone is ready to bury the project € and go back to national currencies.

Do you think that this is possible?

I suspect that will not happen. The policy will depend on such a project, no matter what the cost is. It has brought untold suffering to Europe. The crisis is almost like a war. It destroys economic structures, businesses and livelihoods. Here is a drama being played out. Maybe Italy is still in a similar predicament as Spain, possibly even France. France is, if there the reform is denied, even at a greater risk than Italy.

Why the huge power of the Spanish property market has been ignored for so long?

The manager's elite acts now in very short terms. Board members are under pressure to present their shareholders profits. I once discussed with the CEO of a major European bank, whether a bank would not have to slow down their business as soon as problems arise on the horizon, for example, a housing crisis. The bank chief said that if he brakes too soon, he will lose his seat.

And if he braked too late?

Then the bank loses money and wealth and he also may lose his seat. So it's a matter of timing. Instead of slowing down in the allocation of real estate loans, as the big banks Santander and BBVA are doing since 2007, they have only been on the gas. The two big banks have more international experience because they have a large Latin American business and are also active in the U.S. They have recognized the dangers in the past. The local banks and provincial banks do not have this experience.

The government is now forcing them to terminate their loans and sell real estate.

This initiates the second phase of the real estate debacle. If sold at any price, property prices in Spain will fall further from current levels by 40 percent to 50 percent. This downward spiral carries the entire Spanish banking system into bankruptcy. This can only lead to the nationalization of the big Spanish banks.

What this meant for the Spanish public finances?

The indebtedness of the Spanish state will go up massively. The state must spend probably at least 150 billion euros for the banks. The debt ratio then quickly jumps to well over 100 percent of the economy. This is no longer affordable. The Pension Fund of the Spanish state employees holding 90 percent of its assets in Spanish government bonds. The pensions of state employees could therefore no longer be served, as originally promised. Spain is in a similar plight as Greece, only the much larger dimension. I expect that Spain will withdraw from the euro zone in 2013.

To be continued...