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  1. Wealth
June 13, 2012

Spanish Bailout Risks Fanning the Flames

By Spear's

It is impossible to imagine a bigger balls-up than the Spanish banking fiasco and the EU’s attempts to sort it out

It is impossible to imagine a bigger balls-up than the Spanish banking fiasco and the EU’s attempts to sort it out. The Spanish cajas, or regional banks, borrowed like hell on cheap EU ‘one-size-fits-all’ interest rates of 2 per cent, set to a level required by German reunification, and their customers borrowed like no tomorrow to build houses, to the extent that there are well over one million unsold and unfinished dwellings in the now defunct Spanish housing market. When the funding dried up, these banks became zombie banks overnight, as all that was left for them to do was to twiddle their thumbs and stare at the losses.

The Spanish government with its eyes wide shut then passed these banks as solvent in two stress tests, hoping the problem would somehow sort itself out. This wishful thinking just made the situation worse, until the Spanish government admitted that Bankia, which comprised the seven biggest of these cajas, all bundled together in a building that looks as if the foundations have collapsed and it is about to fall over, needed a €4 billion bailout; a week later it was €9 billion; and another week later it was €29 billion and counting.

So, all the top four accountancy firms were called in to do the counting for them, but how do you count the numbers for an unsellable pile of bricks and mortar no one wants? Meanwhile, JP Morgan has estimated the Spanish banks need €350 billion, and RBS says €450 billion. The accountants are due to report on 20 June, but on 10 June the Spanish government rushed out a €100 billion bailout request: why? Because of EU fears over the outcome of the Greek elections on 14 June.

The EU immediately said ‘Yes’ to this improbable and hasty bailout request; the Spanish government said it was a ‘Victory for Spain’, as there were no strings attached; the EU then tried to work out which pot of empty firewall cash could be raided this time, but no one had any idea which; then the idea was floated that the ESM, or so-called Euro Stability Mechanism, would be used.

Merkel said this would be controlled, however, by a Troika including her finance minister, thus neatly blowing up the Spanish ‘Victory’; this also caused the Spanish debt bond-holders to shudder and shake uncontrollably, as this would mean subordination for them behind the ESM, and the last time this happened, as in Greece, they took a 50 per cent haircut; worse still, these funds would count as sovereign debt and take Spain’s borrowing to 100 per cent of GDP; all of which caused yields on Spanish debt to rise to the breaking point of 7 per cent.

It’s pretty good going when one bailout causes the next crisis, as now the problems of the Spanish bailout are causing untold problems in Rome too. Italy doesn’t have a banking problem like Spain’s, other than the normal illiquidity in which Italian banks seem to revel, but, unlike Spain before its bailout, it has got one helluva sovereign debt problem, with borrowings of €2 trillion, or 169 per cent of GDP, which is itself going backwards by 5 per cent over the next two years.

The ESM pot, you see, doesn’t actually exist in cash, but only as guarantees, of which Italy’s share is 22 per cent, (and France’s is 28 per cent). So the markets take 22 per cent of €100 billion and add this to the €2.0 trillion and decide they don’t like the look of things, so Italy’s bond yield start rising towards the dreaded 7 per cent mark too. And you don’t have to be a genius to surmise that if the contagion is fanned by those trying to put the fires out in this manner that the eurozone as we know it is about to go up in smoke sometime soon as well.

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Good riddance, say I, the sooner the better! Yes, two years of chaos now will be cheaper and better than the inevitable bigger crash down the euro-road going nowhere. The euro is like a giant frog slowly heating up in a frying pan: the frog, you see, alone of all creatures, has no sense of heat, and when the temperature finally reaches the red zone the frog simply and suddenly explodes!

There is one saving grace, however, the longer this euro-nonsense goes on, and that is that when the euro finally does explode like the frog, it is going to take all those euro-institutions with it – the ECB, the ESFS, the ESM, the ELS – as they will all be bust as well! The Bundesbank is already beginning to survey this disaster scenario with some alarm, and it should do so, for it is already sitting on €700 billion of euro-debts resulting from the EU’s Internal Target2 system of unpaid sovereign debts, caused – yes, you guessed it! – by the eurozone’s inherent imbalances. Like I said, you just couldn’t make it up if you tried.

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