You may have heard by now, but Spain was saved yesterday. I know that because the MSM and a bunch of politicians told me so. I’m not sure, but I’m having a sense of deja vu. I think I’ve heard this same story at least ten times over the last two years. I’m sure they’ve got it under control now. You can be absolutely certain that the banks around the world will engineer an epic stock market rally on Monday to celebrate the fact that European taxpayers were just put on the hook for another $125 billion of banker losses. You see, the Spanish banks are insolvent. They are insolvent because they made hundreds of billions in bad real estate loans. They fucked up. Banks have stockholders and bondholders. If a bank fucks up in a truly free market economy, the bank is liquidated, the stockholders are wiped out and the bondholders take a huge haircut. The taxpayer is left out of the equation. But in the real world, bankers control the politicians and they collude to scare the public into believing that when a bank fails the system is in danger. The system is in danger. The system that enriches bankers and politicians at the expense of the average citizen.
I’m no expert on European finances, but I am an accountant and I can calculate a debt to GDP ratio. Rogoff and Reinhart have proven that bad things happen to countries when their debt to GDP surpasses 90%. The chart below tells me everything I need to know about the EU. They’re fucked. For all the believers that this crisis is over, I would point out that Spain has the BEST debt to GDP ratio of all the countries in the EU. Greece is already dead drachma walking. How long before Italy implodes? 1 week? 1 month? 1 year? I’ll take the under.
And if you think the existing debt to GDP is frightful, check out the promises these European politicians have made to their people in order to get elected. Again, Spain is on the low side. It is mathematically impossible for these countries to honor these promises. Luckily, 98% of the developed world population thinks math is hard and slept through their math classes. Therefore, they actually believe they will get these pension and healthcare benefits. France is even increasing the benefits as we speak.
So, with these facts in hand a critical thinking person might wonder where did the $125 billion come from to save the Spanish banks. The story below from Zero Hedge shows the absurdity and ridiculousness of this entire farce. The EU has created two funding mechanisms to bailout countries/bankers. Each country is supposed to contribute a portion of the fund. Hysterically, 13% of the fund is supposed to come from Spain. Greece, Portugal and Ireland were supposed to ante up 7%, but they’re broke too. The funniest assumption is that Italy will supply 20% of the funding. At the end of the day, Germany will have to save all of these countries on the backs of their hard working thrifty citizens. The $125 billion to bailout Spain doesn’t exist. These countries are just adding it to their un-payable future liabilities. It is being printed out of thin air and the bill is being passed to future generations.
I’m sure glad I live here in the good ole U.S. of A. We have our act together. We address our problems. We pay our bills. We tackle our issues head on. We would never live for today, make promises we can’t keep, and pass the bill on to our children. Right?
GOVERNMENT DEBT PER PERSON
Spain IS Greece After All: Here Are The Main Outstanding Items Following The Spanish Bailout
Submitted by Tyler Durden on 06/09/2012 14:52 -0400
After two years of denials, we finally have the right answer: Spain IS Greece. Only much bigger (it is also the US, although while the US TARP was $700 billion or 5% of then GDP, the just announced Spanish tarp is 10% of Spanish GDP, so technically Spain is 2x the US). So now that the European bailout has moved from Greece, Ireland and Portugal on to the big one, Spain, here are the key outstanding questions.
1. Where will the money come from?
De Guindos, Schauble and the Eurogroup, all announced that the sole source of cash would be the ESM and/or the EFSF. The problem with this is that the ESM has yet to be ratified by Germany, whose parliament said previously it is sternly against allowing the ESM to fund a direct bank bailout, something which just happened. Thus, the successful German ESM ratification vote, whenever it comes, and which previously was taken for granted, now appears to be far more questionable.
Which leaves the EFSF. The problem with the EFSF is that there is about €200 billion in dry powder. And this includes the Spanish quota of €93 billion, which we can only assume is now officially scrapped.
Which brings us to a bigger question: now that Spain is officially to be bailed out, what happens next. And by that we mean of course the big one: Italy. Recall that as we posted in Brussels… We Have A Problem, once the contagion spreads again to Italy, and that country also needs a bailout, it is game over. From the world’s biggest hedge fund Bridgewater:
In other words, it is very likely that the funding for the Spanish bailout will have yet to be procured. Who will provide cash which is virtually certain to disappear forever in the Spanish real-estate market mismarking vortex?
2. Where will the money go?
According to the de Guindos press conference, the bailout cash will go to the FROB, or the Fund for Orderly Bank Restructuring: as the name implies a sinking fund to fund insolvent banks. This is merely a liquidity vehicle to net out evaporating capital due to realistic marks of assets, or ongoing deposit flight. However, a far bigger concern is how will the FROB be treated from a sovereign debt perspective?
As was noted previously, the bailout will come in the form of a loan, which while at better terms than market, will still result in a material increase in Spanish debt/GDP. In other words, while the bailout itself may have been without sovereign conditions, it will still impair the country in the eyes of sovereign creditors. And just as important is the mention that the loan will have “better terms than market” – this implies added security compared to general Spanish obligations. Hence priming.
Recall the official breakdown of the complete Spanish debt, presented here courtesy of Mark Grant 2 months ago:
The Data
Spain’s GDP $1.295 trillion
SPAIN’S NATIONAL DEBT
Admitted Sovereign Debt $732 billion
Admitted Regional Debt $183 billion
Admitted Bank Guaranteed Debt $103 billion
Admitted Other Sovereign Gtd. Debt $ 72 billion
Total National Debt $1.090 trillion
SPAIN’S EUROPEAN DEBT
Spain’s Liabilities at the ECB $332 billion
Spain’s Cost for the EU budget $ 20 billion
Spain’s Liabilities for the Stabilization Funds $125 billion
Spain’s Liabilities for the Macro Fin. Ass. Fund $ 99 billion
Spain’s Guarantee of the EIB debt $ 67 billion
Spain’s Total European Debt $643 billion
———————————————————————-
Spain’s National and European Debt $1.733 trillion
Spain’s OFFICAL debt to GDP Ratio 68.5%
Spain’s ACTUAL Debt to GDP Ratio 133.8%
* * *
Now we have another €100 billion or so in admitted sovereign debt to add to the top of the list. In other words, total Spanish admitted debt will likely increase by up to 17% from $732 billion to $857, adding the $125 billion FROB “loan.”
3. What happens to Spanish sovereign debt?
Perhaps the most important thing to note in the above analysis is that the FROB loan is effectively a priming DIP: think Troika loans to Greece, Ireland and Portugal.
In other words, Spanish bondholders just got their first taste of subordination!
Basically, first thing Monday the trade off will be: does the temporary improvement in bank solvency offset the fact that bonds just got primed, hinting at a future that in the case of Greece has resulted in the old Greek bonds trading an equivalent price of sub 10 cents on the dollar.
How long until Spanish bondholders get the hell out of Dodge, knowing quite well that their Spanish bond holdings will suffer the same fate as GGBs?
Our advice for those who need to have exposure, as we wrote 5 months ago: sell local-law, covenant-lite Spanish bonds, and buy their UK-law, covenant-protected cousins.
Then sit back and watch the spread explode.
4. Precedent
Naturally with Spain now officially biting the bullet, the only question remaining is: when is Italy going to drop next.
And ironically, what just happened, is that the Eurozone, with the tacit agreement of Germany, essentially gave insolvent banks a green light to short themselves into a full bailout.
How long until Italian banks get the hint, and proceed to short each other, or themselves, either with shares of stock or , better yet, through CDS which unlike in the sovereign case, can be held without an offsetting cash basis position. In other words: is it time for the Italian bank suicide trade?
Because only when they are on the verge of nationalization, will Italian banks be rescued. And remember: he who defects (or in this case drops the fastest), first, reaps the biggest benefits of the resultant action.
We also wonder how will Ireland feel knowing that it has to suffer under backbreaking austerity in exchange for Troika generosity, while Spain gets away scott free.
Finally, there is the question of how today’s action will impact the Greek elections. As noted earlier today, today’s precedent will likely serve as a huge boost to the popularity of Syriza. Oh yes, the Greek elections next Sunday. Remember those, and the whole Grexit thing?
5. Market reaction
The long-term reaction is obvious: this latest confirmation that Europe is a sinking ship has been predicted by many for years. As such, that European risk markets will continue sinking, and capital flows continue rushing to Germany, is a given. In the short run, however, courtesy of a new all time record high number of EUR shorts (at a record -214,418 net non-commercial contracts as of this past week) it is likely we may see an aggressive short covering squeeze.
This will send all risk higher as well. Of course, the really is to be faded aggressively as soon as the weak-hand shorts capitulate and cover.
Administrator says:
Details of the Secret “Nannyplan” Emerge; Proposed Nannygroup Uniforms
EU nannycrats are marching forward with plans without regards to Germany or German constitutional issues.
The plan is dead on arrival because it includes eurobonds and other questionable items, but nannycrats do not care about such issues.
List of Nannycrats Working on the Master Nannyplan
•European Union Commission President Jose Manuel Barroso
•European Council President Herman Van Rompuy
•Euro group head Jean-Claude Juncker
•European Central Bank President Mario Draghi
Notably missing is anyone representing Germany although though the plans include eurobonds. Even if one ignores the eurobond issue, the nannyplan cannot possibly fly.
I pieced together details from an article on Reuters: Europe works on new euro zone bond plan
The original source is cited as Der Spiegel but as is typical in economic articles, no links to external sources are provided.
I happen to believe that if you quote someone you ought to have the decency to put in a link, but these days few do. Rant aside…
Nannyplan Details
•Plans will create a “genuine fiscal union” in which individual member states would no longer be able to independently take on new borrowing.
•Governments would only be able to decide how to spend money that is covered through their revenues.
•Any country that needs more money than it takes in would have to report that need to the group of euro finance ministers.
•Finance ministers will decide which financial levels are justified and would then issue joint euro bonds to finance these new borrowing needs.
•”The exclusive group of ministers would be led by a full-time chair, who could ultimately rise to the position of European finance minister”
•This “powerful group of finance ministers” would be controlled by a new European body in which representatives of national parliaments would have seats.
Nannyplan Synopsis
1.The proposal is to create group of nannies (similar in theory to the Fed except the decisions are primarily fiscal).
2.The group of nannies will be headed by a master-nanny (think someone like Bernanke or in this case Jean-Claude Trichet). The nanny-master will originally be a full-time chair. However, that person could ultimately rise to the position of “European Finance Minister (EFM)”, but also known as “Grand Poobah”.
3.The nannies will be controlled by elected politicians who will no doubt appoint a master-nanny who will do what the majority wants.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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10th June 2012 at 9:33 am
flash says:
Maybe the US can help Spain out with few trillion,after all we’ve got Bennie’s Magic Printing Press.
Paying $5.21 for a dollar
The problem, however, is that the debt-shifting that Karl describes is even more significant than most people who know about it grasp. The federal government has not only increased its outstanding debt by 105.76 percent, but as I will show in my column tomorrow, it has provided 168 percent of the $3.3 trillion in post-crisis credit growth. This means that when people talk about the economy needing $3 in new debt to purchase $1 in GDP growth, they are failing to account for the decline in private credit. In other words, the federal government has needed to take on $5.21 in new debt in order to purchase $1 in new nominal GDP.
http://voxday.blogspot.com/
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10th June 2012 at 10:05 am
Yojimbo says:
Excellent commentary. I thought you might want to correct a misspelling:
“Greece, Portugal and Ireland were supposed to ante up 7%, but their broke too.”
It should be “they’re”.
Keep up the good work.
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10th June 2012 at 10:12 am
flash says:
Great idea from Keen.
I’m sure his jubilee justice will do wonders for the value of savings accounts.
Steve Keen: Why 2012 Is Shaping Up To Be A Particularly Ugly Year
Submitted by Tyler Durden on 06/09/2012 21:39 -0400
http://www.zerohedge.com/news/steve-keen-why-2012-shaping-be-particularly-ugly-year
“Therefore, I am talking in favor of what I call a modern debt jubilee or quantitative easing for the public, where the central banks would create ‘central bank money’ (we cannot destroy or abolish the debt, which would also destroy the incomes of the people who own the bonds the banks have sold). We have to create the state money and give it to the public, but on condition that if you have any debt you have to pay your debt down — no choice. Therefore, if you have debt, you can reduce the debt level, but if you do not have debt, you get a cash injection.”
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10th June 2012 at 10:26 am
Nonanonymous says:
flash, the same way the UST have been propping up state’s balance sheets. 11 of 50 states are technically bankrupt. All of their budget woes magically disappeared, at least we don’t hear about them anymore, except California, but it seems they have some gienormous pension fund which could balance their budget. Problems, what problems?
Unfunded entitlements will prove to be our undoing, and we can start pruning with the retirement pension and benefits the US Congress has voted for themselves. Pension funds are going to be nationalized along with the banks, and we’ll have nationalized health care. I will fight to the death before I live in a society with a two tiered health care system, which the priviledged conferred upon themselves at the expense of everyone.
Soviet Russia was a communist state where 2% of the society were party members, shopped at the best shops and lived in the best housing. Capitalism is headed toward a system where 1% are the beneficiaries of the fruits of production, the means of production are controlled by 1/10th of 1%, and everyone else is chattel.
When the rule of law no longer applies, the police state becomes the enemy.
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10th June 2012 at 10:31 am
flash says:
Nonanonymous, thanks for making me look.
It figures.Damn lib-tard states and yes , I consider Fla one as well.
11 States Most Likely to Go Bankrupt -
11. PA – Blue
10. FL – Purple
9. OH – Purple
8. MA – Blue
7. RI – Blue
6. NY – Ultra Blue
5. NV – Purple
4. NJ – Ultra Blue
3. MI – Blue
2. CA – Bluest of the Blue
1. IL – Blue and DUMB!!!
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10th June 2012 at 10:49 am
Steve Hogan says:
The data is a little stale. Uncle Sam is now at a debt to GDP ratio of 103% and the government debt per person surpassed $50,000 (and that’s just at the federal level).
If one adds total debt (nearly $57 trillion) with the unfunded liabilities ($119 trillion) and divides by the population (313 million), it comes to $562,000. Of course, two thirds of the population are comprised of children, the retired, the unemployed, and the welfare community. The burden on those of us that are earning a paycheck is simply staggering.
In other words, we won’t pay this bill. We can’t pay this bill. The reset is going to be interesting. If you don’t have precious metals socked away, you are a bug searching for a windshield.
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10th June 2012 at 12:09 pm
DaveL says:
Jim: How does Japan survive with a Debt/GDP ratio over 200% ?
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10th June 2012 at 12:23 pm
ron says:
On the tv they said we gave 50 billion.but were broke so?
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10th June 2012 at 12:59 pm
Administrator says:
DaveL
They did survive for the last twenty years because they had humungous trade surpluses and the Japanese public had a 15% savings rate. The debt was financed internally. Now their trade surpluses have shrunk and the savings rate is 3% and their population is the oldest on the planet. They are a bug in search of a windshield. There simply aren’t enough buyers of debt in the world, especially at 1% interest rates. I can’t tell you when Japan will implode, but they will.
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10th June 2012 at 1:03 pm
Maddie's Mom says:
ron,
There you go thinking again…..
Stop it!
Aren’t you supposed to be watching some reality show or somethin’???
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10th June 2012 at 1:09 pm
Administrator says:
German Opposition Threatens To Scuttle ESM, And Spanish Bailout, Ratification
Submitted by Tyler Durden on 06/10/2012 13:39 -0400
Gradually, the key open items from yesterday’s Spanish bailout are getting some closure. First, we learned that Ireland, as speculated, will demand a comparable retroactive bailout renegotiation, an act which also puts the Greek elections a week from today in play. Then, we got definitive confirmation that the Spanish loan, coming at ~3% or half Spanish GGBs, is a priming loan, subordinating existing creditors. Finally, we learn that the ESM – the bailout mechanism at the heart of all current and future European bailout plans, and which still has not been ratified by Germany, is in danger of being scuttled by none other than the German opposition. The reason? According to a Reuters report, “A [Spiegel] report that German Chancellor Angela Merkel is not serious about implementing a European financial transaction tax threatens to undermine an initial deal struck last week with the opposition over the EU’s planned fiscal pact… The Social Democrats (SPD) and Greens are insisting on a plan for a transaction tax and measures to boost growth.”
It now appears, Merkel has been posturing on the issue which the opposition holds quite dear. However, she needs the opposition on her side to pass not only the fiscal pact but the ESM ratification, without which the entire Spanish bailout collapses: “She wants to push the pact through parliament in the next few weeks together with a bill on the new European Stability Mechanism (ESM) bailout fund which Spain may use, but needs the opposition to get the required two thirds majority.” All this ignores what Die Welt reported earlier today, that “Spanish banks should come under special supervision” according to Volker Kauder, parliamentary leader of Merkel’s CDU, something which the Spain public would violently oppose. In other words: hold off on popping the Spanish bailout champagne…
Continuing with Reuters:
It would be a major embarrassment if Germany, which as euro zone paymaster dictates much of its crisis response, missed its deadline for ratification on July 1 when the ESM is due to take effect.
Finance Minister Wolfgang Schaeuble tried to pressure the SPD and Greens.
“It would be completely irresponsible not to ratify the fiscal treaty,” said Schaueble on ARD television, adding he doubted a European financial transaction tax would be introduced in this legislative term which runs until next year’s elections.
He said on Saturday that Spain’s decision to request aid made it even more important to quickly ratify the fiscal pact and ESM. Its greater flexibility makes the ESM preferable to the European Financial Stability Facility (EFSF) to use for Spain.
The fact is that now that Germany has pre-committed to an ESM-funded rescue, the German opposition suddenly finds itself with absolutely all the leverage. It knows very well that without its support, the ESM, the Spanish Bailout, and implicitly, the EMU itself, crumbles. Can you spell nuisance value again?
In the meantime, it seems that even if the ESM vote passes, the European banking sector will be crippled for years to come, as the gating issue is now the same transaction tax that the US and UK had been rejecting for years:
The magazine report triggered an angry response from the SPD and Greens.
“Ronald Pofalla’s comments are a blow to the fiscal pact talks,” said senior SPD member Thomas Oppermann, adding they sowed doubts as to whether the coalition really wanted a deal.
“We need an irreversible commitment to introduce a financial transaction tax. There will be no formulaic compromises with the SPD,” he said.
In essence, a lose-lose for Europe’s insolvent banks, as being forced to pay even more tax will sap already negative profits even more.
But the bigger issue for now, of course, is whether the fiscal pact, and thus the ESM, can even get the required votes.
SPD leaders stressed at the weekend that its support for the fiscal pact was not yet a done deal.
“Agreement with the federal states is still needed and the government has delivered little on growth and fighting youth unemployment,” SPD parliamentary party leader Frank-Walter Steinmeier told the Frankfurter Allgemeine Sonntagszeitung.
“There must be movement on this in the coming days.”
On Monday, Schaeuble will discuss the fiscal pact with ministers from Germany’s 16 federal states and parliamentary leaders from all parties will also hold talks.
At the end of the day, what really matters is popular opinion, and needless to say, it is not supportive of what just happened.
Highlighting the domestic pressure she is under to take a tough line with struggling euro zone members, an Emnid poll for Bild am Sonntag newspaper showed 66 percent of Germans are opposed to supporting Spanish banks with German money.
And of course, there is this from May 30:
Germany’s Government Still Opposes Direct ESM Aid For Banks
Government spokesman Steffen Seibert said at a regular press conference here that the German rejection of the idea of any direct recapitalisation of banks by the ESM “is well known.”
The treaty creating the ESM explicitly states that the fund can only lend to governments in return for promises of reforms. The German government has stressed on numerous occasions that it insists that this passage of the treaty is respected. The treaty has yet to be ratified by most governments including Germany.
Stated otherwise, an unwind of the existing bailout framework is only one general election away, when am upstart party takes advantage of the popular anger at the Spanish bank bailout, and proceeds to undo years of Merkelian pro-Euro policies.
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10th June 2012 at 2:08 pm
Drtypierat says:
The europeans wont care for a few more weeks, the european championship kicked off a few days ago.
That will allow the politicians to slip a lot of things thru, the people will be paying even less attention than normal.
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10th June 2012 at 7:38 am