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:
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.
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.