Archive - Jun 9, 2012

The spigot is schtuck!

At the high level, our global economic plight is quite simple to understand says noted Australian deflationist Steve Keen.  Banks began lending money at a faster rate than the global economy grew, and we're now at the turning point where we simply have run out of new borrowers for the ever-growing debt the system has become addicted to. Once borrowers start eschewing rather than seeking debt, asset prices begin to fall -- which in turn makes these same people want to liquidate their holdings, which puts further downward pressure on asset prices.

Well that didn't take long. The ink on the #Spailout is not dry yet (well technically there is no ink, because none of the actual details of the Spanish banking system rescue are even remotely known, and likely won't be because when it comes to answering where the money comes from there simply is no answer) and we already have an answer to one of our questions. Recall that mere hours ago we asked: "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." We now know. From the AFP: "Ireland wants to renegotiate its rescue plan to benefit from the same treatment as Spain, which looks set to win a bailout for its banks without any broader economic reforms in return, European sources said on Saturday." And with Ireland on the renegotiation train, next comes Greece. Only with Greece the wheels for a bailout overhaul are already in motion and are called a "vote of Syriza on June 17." And remember how everyone was threatening the Greeks with the 10th circle of hell if they dare to renegotiate the memorandum? Well, Spain just showed that a condition-free bailout is an option. Which means Syriza will get all the votes it needs and then some with promises of a consequence free bailout renegotiation. In other words Syriza's Tsipras should send a bottle of the finest champagne to de Guindos - he just won him the election.

"We already knew the ESFS and ESM would lend Spain money, the question is in what manner?"

Mark Carney announced a few days ago the Bank of Canada will keep its benchmark interest rate steady at 1%.  This announcement comes despite his previous warnings over the enormous increase in Canadian private debt.  But of course the run up in debt couldn’t have occurred if interest rates were determined by market factors only.  Had supply and demand been allowed to function freely, interest rates would have risen as a check on the swell in debt accumulation.   Carney won’t admit this though.  Like all central bankers, he has made a habit of boasting the positive effects of his low interest rates policies while avoiding blame for the negative consequences. He is a bartender who gleefully takes the drunk’s cash while replying with “who, me?” when said drunk drinks himself to death. Carney’s decision to keep interest rates suppressed is yet another instance of a central banker unable to face reality.  The malinvestments will continue to accumulate and will have to be liquidated at another date.  What Carney has done to mitigate the looming debt and housing bubble is effectively kick the can down the road.  He has revealed through his actions the undeniable truth which holds for all central bankers: that they have no other card to play but the printing press. 

DON'T Waste Any Time Reading This ... Unless You're Afraid

"When it becomes serious, you have to lie", Jean-Claude Juncker

Mariano Rajoy from May 28, or 12 days ago: "No va a haber ningún rescate de la banca española." Or, more conveniently for the America-based readers: "There will be no rescue of Spanish banks." We have finally found the official Jean-Claude Juncker (and of course Tim Geithner) replacement.

On Thursday, it was all Merkel's fault when #StopMerkel took Spain by storm. Well, whatever it was that Merkel was supposed to stop doing now no longer seems to matter in the aftermath of the unprecedented Spanish bailout. And as a result the Spanish public's fury has shifted 180 degrees, and instead of blaming Germany, it now is accusing its own leaders of cowardice. Presenting #RajoyCobarde (or Coward Rajoy).

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.

The Eurogroup supports the efforts of the Spanish authorities to resolutely address the restructuring of its financial sector and it welcomes their intention to seek financial assistance from euro area Member States to this effect. The Eurogroup has been informed that the Spanish authorities will present a formal request shortly and is willing to respond favourably to such a request....

Spain's economy minister Luis de Guindos will hold a press conference detailing the terms of the bank bailout shortly. It can be watched live, and without translation, at the link below. In summary, the Spanish bank bailout is apparently a loan targeting the FROB, and at rates better than the market. In other words, the cramdown of Spanish bondholders has officially begun.

FTW...

For those curious what the latest and greatest estimate of the Spanish bank bailout, which at last count was €100 billion and growing fast, would look like in US terms, here is a rough and dirty comparison of the scale we are taking about here...

In Bankia’s case all of this culminated in the bank receiving a €19 billion Euro bailout, the largest in Spain’s history. And for certain this amount of money will be increased dramatically: Bankia’s loan book is roughly €200 billion in size (1/5^th the size of Spain’s GDP) and I can assure you a major chunk of this is total and complete garbage. That’s not the problem however. The REAL problem is that Spain itself is broke and doesn’t have the money to prop this bank up…