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Guest Post: It’s Only PIG: Fears About Spain Are Overblown

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Submitted by JM

It’s only PIG:  Fears about Spain are Overblown

OTR bonds yields just don’t support the case that Spain is the “S” in the PIGS.  Spanish debt is higher than Bunds, but they are nothing like unserviceable. 

It makes more sense to think of EU sovereigns as junk grade: Greece, Ireland, and Portugal; middle tier credits with balance sheet stress that appreciably impact yields, like Belgium, Spain, and Italy; and credits like Germany and the Netherlands that benefit from derisking.

Q1 GDP grew .7% y-o-y.  Also, the CDS market shows an improvement in sentiment on Spain.

Spanish CDS, May 2010-tonight

Assuming 40% recovery, this spread is pricing in a 14% probability of a Spanish default in the next five years.  One shouldn't think of this probability of default as a classic probability derived from frequencies.  It is the view on default implied by aggregate buyers and sellers of Spanish government credit risk at the 5 year tenor.  This notion of implied probability “works” because it is the meeting place of willing buyer and seller at a given point in time.  It is nothing more than a market view of credit risk given the premium needed for a seller and the credit risk hedging needed for a buyer to both take the trade.  

There are other possible explanations that sentiment in this spread.  Possibly the CDS spreads reflect a certain large marginal buyers selling CDS to push down cash yields, acting to create a kind of fake-out.  CDS premium is cheap to OTR cash yields (see below).   Either way, the spread is an indicator of the the view of institutions with fast execution and informational advantage over most others. 

There are legitimate grips about the information content of these spreads, which I respect.  But CDS were created and function to address a basic business need that dealers have.  Dealers have an inventory of underlying securities on which they need to hedge credit risk.  The need became acute in the early 1990s because extremely low interest rate and liquidity policies from central banks altered the return distributions on bonds of all types.  These policies lower the first and second moments of the distributiion at the expense of much fatter tails that are best dealt with by hedging.

Politics Matters

The correlation between the Euro and Spanish credit risk shows that Spain is a domino too big to fail.  It is difficult to conceive of a situation where policymakers would say goodbye to their own jobs by permitting a default.  These are fundamentals that matter.     


It is doubtful that policy can actually stave off default, because liquidity provision is the limits of their arsenal.  However, liquidity policy can extend kicking the can down the road for a time.  The bottom line is cost of funding.  Once it reaches a threshold level, there is just too much pain and default becomes the politically acceptable option.  We are nowhere near funding costs that in Spanish government bonds.  If fact, the relative pricing of synthetic and cash makes for a compelling trade. 

Bottom line here is that one can use numbers and information to play the numbers, but the view you take is always speculative.

OTR Spanish 5Y Government Bonds, tonight’s quote


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Sat, 05/07/2011 - 16:23 | 1251371 The Gold Theory
The Gold Theory's picture


Sat, 05/07/2011 - 16:42 | 1251427 Tulli
Tulli's picture

Here are some facts that all Finns (and everyone else) should know about Portugal:

Sat, 05/07/2011 - 16:59 | 1251477 vote_libertaria...
vote_libertarian_party's picture

So this is the Portugese way of begging Finland to not veto any bailouts?


What is the time line of when Finland would act?  Is there a showdown vote on the calendar yet?

Sat, 05/07/2011 - 17:40 | 1251547 Tulli
Tulli's picture

The vote is on May 16th. By then the Finns will have said yes. Until then, the Portuguese will mock them as hell, knowing full well that they will be mandated to comply.

You may also have noticed that the interest rate that Portugal will pay is well below Greece or Ireland, and the package is lighter (and even still will be renegotiated).

Is it a coincidence that:

- The President of the European Commission (Barroso) is Portuguese;


- The Vice-President of the ECB (Constancio) is Portuguese;


- The very recently appointed Director for Europe at the IMF (António Borges),

Are all Portuguese?

Only if you believe in the tooth fairy.

Yes, the Finns will comply, Yes the bailout will be renegotiated later on, Yes this was yet again another form of saying "Give us the money or we will drop out of the Euro and your exports (53% of all Europe exports) will no longer be allowed in our waters.

The Paulson Bazooka revisited, Lisbon style.

Enjoy your weekend.

Sat, 05/07/2011 - 18:49 | 1251669 bank guy in Brussels
bank guy in Brussels's picture

Tulli wrote:

« Here are some facts that all Finns (and everyone else) should know about Portugal: »

That's a wonderful entertaining cultural survey of Portugal in six minutes of video.

Great ironic finale about how, in decades past, the Portuguese took up a massive collection for the hungry and cold people of Finland.


Sat, 05/07/2011 - 20:55 | 1251871 Canucklehead
Canucklehead's picture

Don't you find that video embarassing for Portugal? I can't think of any serious country that would present it's "strengths" in such a way.

Maybe if Finland gave the old clothes back you could call it even....

Sun, 05/08/2011 - 08:11 | 1252646 Non Passaran
Non Passaran's picture

What a waste of time. A bunch of useless information.

Sat, 05/07/2011 - 16:56 | 1251472 jm
jm's picture

If I'm taking the "S" out, then I'm not going to dignify the inclusion of Italy.

Sat, 05/07/2011 - 18:32 | 1251646 bank guy in Brussels
bank guy in Brussels's picture

You're quite well-justified in arguing there is something different about Spain versus Greece, Ireland and Portugal -

This is indeed where the EU - ECB are drawing the line. Every resource is being used, and will be used, to hold that line. People I know in the relevant EU agencies are working late hours and weekends to make sure the previously bailed-out countries are ring-fenced. Germany is fully on board with the programme to save Spain within an intact euro-zone, even if in the long term there are restructurings (which would include the German and French banks).

JM - your yin-yang avatar, as well as being a classic evocative spiritual emblem, was also the symbol of North America's Northern Pacific Railway. Always wonderful to see it on the model and toy train locomotives and cars. (Look, e.g., at 'Northern Pacific' on eBay.)


Sat, 05/07/2011 - 18:51 | 1251673 jm
jm's picture

It's on my surfboard.

Sun, 05/08/2011 - 05:15 | 1252565 ZeroPower
ZeroPower's picture

"JM - your yin-yang avatar, as well as being a classic evocative spiritual emblem, was also the symbol of North America's Northern Pacific Railway." Any ideas behind the history/significance of it on a railway system?

Sun, 05/08/2011 - 08:11 | 1252649 Non Passaran
Non Passaran's picture

People I know in the relevant EU agencies are working late hours and weekends to make sure the previously bailed-out countries are ring-fenced.

LOL.  And what exactly does that "work" consist of? Deciding (in secrecy) who will pick the tab?


Sat, 05/07/2011 - 18:59 | 1251683 The Gold Theory
The Gold Theory's picture

Have you looked at debt to gdp?  I saw an article on ZH referencing Greenspan's opinion that any country that breaches 90% debt to gdp is doomed recently... I tend to agree there and Italy has 120% debt to gdp, the only PIIGS with higher debt/gdp is Greece at 142%.  Am I missing something or are you assuming that current bond yields are properly pricing in the uncertain future?

Sun, 05/08/2011 - 03:27 | 1252507 Mentaliusanything
Mentaliusanything's picture

And Japans Debt is 210% of GDP excluding the 4.8 triilion yen required to recover from its triple Hex.

Gross domestic product is not a determinate in bankrupcy.

Reggie has a complicated answer here -

But this might give you a cold shiver if you take the time to read it. It includes a video about China and how its GDP is so large but its ordinary people are so poor. Time to think about Gross Domestic Happiness (GDH) which some countries have in abundance

Sun, 05/08/2011 - 08:12 | 1252630 jm
jm's picture

I look at public debt to GDP and external debt more than gross debt.

To me, these mettrci better address the issue of "can they roll the debt?"

Forget retiring the debt. It's about rolling debt whilst cutting operating budgets to sustainable levels. 

And don't think that I'm saying there is no pain coming for some of these countries... but default risk is overstated for them.

If the ECB/EU really has its mind to it, they have poweful tools to kick the can down the road.  A monetary authority can break the rules and print.  Given this directive, a prxoy can sell CDS on the debt, creating mechanism for spread compression and the appearance that everything is all compression and light.

That mechanism actually doesn't guarantee solvency, that is the tough work for Spain.  It is a question of their assessment of the benefits and pain, and their willingness to honor their obligations.  But it does put time on the side of the tail-risk killers. 

The whole idea of "Middle Tier" countries came from looking at the EU sovereign debt curves.  The curves for the periphery look a lot like C grade junk.  

Sun, 05/08/2011 - 14:35 | 1253317 Highrev
Highrev's picture

I just responded to another of your posts down a bit and was reminded of this post.

It's about rolling debt whilst cutting operating budgets to sustainable levels. 

That's it in a nutshell, and cutting operating budgets to sustainable levels IS ENTIRELY FIESABLE in the Spanish case.

Cutting out the graft and corruption and getting public employees to actually work would in and of itself turn the situation 180 degrees. (That’s a caustic joke that is dead seriously based in reality.)

One of the similarities the Mediterranean countries do share is a very inefficient public service system ripe with corruption and vested interest. On a social-cultural level, my reading is that the Spanish as a people are ready to address that issue. My reading on Portugal is the same, but with much less emotional commitment. I think we could say that the Italians are interested in getting serious (especially the northern half), but, in this regard, this is where I think Greece finds itself as the odd-man-out.




Sat, 05/07/2011 - 16:25 | 1251382 kushmere
kushmere's picture

I thought the problem with Spain wasn't so much its own finances, but rather how its finances were linked to Portugal and Ireland. 

It was my understanding that a haircut or default/restructure by Greece would ripple out to Ireland, Portugal, and Italy which would in-turn put additional pressure on Spain. 


Perhaps an expert can put it in perspective?


Sat, 05/07/2011 - 16:33 | 1251396 Reptil
Reptil's picture

That, and the private debt and unemployment is Spain's bigger problem.

Sat, 05/07/2011 - 17:03 | 1251480 AgShaman
AgShaman's picture


had I seen your post i'd have kept my mouth (digits) shut

Sat, 05/07/2011 - 16:59 | 1251478 AgShaman
AgShaman's picture

Hadn't heard that one...but another that's been brought forth by others was that it had a very large unemployed group of younger people....also a real estate bubble that rivaled the US.

I haven't visited Spain...i'd like to...maybe when some of these countries get their **** together...I'll get back into travelling more.

Sat, 05/07/2011 - 18:40 | 1251660 bank guy in Brussels
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Whatever might appear from reading economics articles, in real life on the streets and in the countryside, Continental Europe is still the greatest achievement ever in human civilisation.

Don't hestitate to visit right now; sit in one of our relaxed cafés with a glass of wine or a beer, and and you will slowly start to realise why things here are 'all right' regardless.

And you may also start to see why many American gringos have picked up their marbles and quietly escaped here, and smacked themselves for not moving here much earlier.

Sat, 05/07/2011 - 23:42 | 1252257 FeralSerf
FeralSerf's picture

The best ice cream and chocolates in the world.  No contest (except perhaps with a certain Roman chocolate ice cream maker).

Brussels is a wonderful city -- many good memories!

Sun, 05/08/2011 - 05:16 | 1252568 ZeroPower
ZeroPower's picture

I've been trying to enjoy this "continental" atmosphere for about a year now, and i must tell you, theres nothing pleasant about having to pay my 4EUR coffee (well, its an espresso really, but the French dont know the difference) every morning. France is ridiculously overpriced (even compared to Germany!) and, as the French president might or might not have noticed, its being overrun by foreigners (think MENA) who come in to steal benefits and stay for free.

Western EU was the win years ago. Not anymore, unfortunately.

Sun, 05/08/2011 - 09:36 | 1252741 Bendromeda Strain
Bendromeda Strain's picture

Don't hestitate to visit right now; sit in one of our relaxed cafés with a glass of wine or a beer, and and you will slowly start to realise why things here are 'all right' regardless.

Arnold and Maria were filming commercials saying the very same thing for scroomed California. Cynical me, do I detect a trend?

Sun, 05/08/2011 - 13:00 | 1253083 Highrev
Highrev's picture

The difference is that Europe isn't making commercials saying so and California is.


Sat, 05/07/2011 - 17:06 | 1251485 jm
jm's picture

The problem with Spain has nothing to do with Greece and Portugal, although the latter could hurt Santander to soem extent.

The problem of Spain is NPLs at the Cajas, the national savings banks and residential lenders.

They have about E120 billion in performing loans, some could sour.  They have E28 billion in NPLs already written-off/socialized.  They have about E50 billion in reserves.  Spanish gov already has E20 billion provisioned for losses (no need to borrow this, already done).

This isn't bad.  

There will be ripples which will stress the middle tier, but they won't break.

Sat, 05/07/2011 - 17:26 | 1251524 Re-Discovery
Re-Discovery's picture

The article makes the obvious mistake of looking at Spain as if it exists independent of the Eurozone.  It is not whether Spain will fail.  It will.  The only question is WHEN the ENTIRE eurozone will fail.

The writer employs classic bubble thinking, i.e. the thinking displayed by people who live in them.  To say that charts say everything is OK in Spain disregards any number of unknowable event risks that exist in highly inner-connected economies of the rest of the eurozone.

Sat, 05/07/2011 - 17:34 | 1251541 jm
jm's picture

I'm certainly not saying that I am right and everyone else is wrong.  Let's try to be civil to each other in this little corner. 

Spain going back to a Peseta and Germany goes back the Dmark, is unlikely and a separate issue. The spread is the spread.  Spanish debt is nothing like Greece.

Sat, 05/07/2011 - 17:42 | 1251556 Re-Discovery
Re-Discovery's picture

Aside from this being "Fight Club" which I think an artifice too often relied upon by posters here simply to be rude, I think you are mistaking critical for un-civil.  I was being the former.

Thank you for taking the time to gather the information and post the article.  I do think the issues in Spain are far under-reported and ill-considered.

Sat, 05/07/2011 - 17:44 | 1251564 jm
jm's picture

Thx back.  I'm just sick of how this site sometimes devolves.  You know what I mean.

Sat, 05/07/2011 - 17:50 | 1251570 Re-Discovery
Re-Discovery's picture

I am curious, why do you see a return to national currencies unlikely?  Didn't these countries have their own currencies for hundereds of year prior to the eurozone 'experiment'? 

Aren't the daily fails in the eurozone making change of the system increasingly more likely?

Sat, 05/07/2011 - 17:55 | 1251579 jm
jm's picture

There's no benefit in dropping the euro for anybody that matters yet. 

Sat, 05/07/2011 - 18:09 | 1251608 Re-Discovery
Re-Discovery's picture

Germany is the only one that 'matters'.  And they will  make the decision easy for everyone soon enough.  Then the whole issue of foreclosure will make the concept of the 'euro' among the most loathed in the history of the continent.  Right up there with fascism and the imperial (not modern) Catholic Church.

Sun, 05/08/2011 - 11:30 | 1252875 gorillaonyourback
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remember that meeting between germany russia and china about 6 months ago?. it was basically in private and word was they were talking about making their own union.  Germans are not that stupid to try and keep a debt ladened union together with out preparing for an exit plan.

Sat, 05/07/2011 - 16:32 | 1251394 falak pema
falak pema's picture

move to Barcelona and buy cheap flats...

Sat, 05/07/2011 - 16:32 | 1251402 AG BCN
AG BCN's picture

good luck with that one. Let me know how it works out.

Sat, 05/07/2011 - 16:32 | 1251395 Seasmoke
Seasmoke's picture

its all Systemtic

Sat, 05/07/2011 - 16:39 | 1251408 Franken_Stein
Franken_Stein's picture


Germans want a ban on CDS, since it is paper fraud, courtesy of Blythe Masters.

It serves only one party, the banks.

Why would one think that an instrument, invented by a notorious liar and thief would serve any greater common good ?


Banks do not create value.

They are there for one purpose only:

To steal from, to rob from, to expropriate, to deceive hardworking people all over the world who create the wealth of this world with their hands and their minds.


So it's time to abolish the pen pushers and paper shufflers, the tie wearing chair-farters, the losers in pinstripe suits.


Sat, 05/07/2011 - 16:39 | 1251422 Daedalus
Daedalus's picture

Yeah right.

Because all of the Spanish banks are solvent and liquid?

Ireland is in trouble because it acknowledged its banks were bust and guaranteed to fix them.

I reckon that if Spain tried to do the same it would also have some BIG problems.

Do you know what percentage of the loans to property developers made by banks have been written off?

How about loans secured on undeveloped land which will now remain undeveloped for decades?

Once these problems are resolved, I might start to believe that there are no problems in Spain.

Sat, 05/07/2011 - 16:46 | 1251444 AG BCN
AG BCN's picture

agreed, everything and I mean everything is covered up. In Southern Europe it's a way of life.

Sat, 05/07/2011 - 16:53 | 1251466 topcallingtroll
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They might be able to keep it covered a long time.

Like cognitive dissonance once said." If you are one year early you are a genius. If your predictions are five years early you are a nut."

Sat, 05/07/2011 - 17:14 | 1251506 AG BCN
AG BCN's picture

They are hanging on as long as they can, waiting/praying for an upturn, but we are years away from that. In 1,2 or 5 years from now it will go down. I have been watching the real estate market in Barcelona and the surrounding areas very closely. Nothing has moved for 3 years, tens of thousands of unsold or incomplete properties. The banks are buying the distressed properties so they don't show up as a balance sheet loss, they are still valued at 10 x average salary. Nothing is going to move even at the current low interest rates. I can't imagine what will happen when JCT puts the rates up to +4% to curb inflation.

Sun, 05/08/2011 - 14:46 | 1253356 Highrev
Highrev's picture

Goggle "world's safest banks"

What do you come up with? The first U.S. bank is 30th on the list of the top hit!

Four Spanish banks are ahead.

The top 9 are all European.

I've been saying for a long time that Europe has problems, there's no denying that, but the blow-out-of-proportion presentation of such by the U.S. mainstream press is nothing short of a blue herring.

. . . aimed at whom? . . . for what purpose?

It certainly gives breathing room to the USD as the European boogieman is trotted out from time to time.


Sat, 05/07/2011 - 17:04 | 1251486 jm
jm's picture

See above.  The Spanish government is being very transparent here, if optimistic in their projections.

Sat, 05/07/2011 - 16:49 | 1251437 Reese Bobby
Reese Bobby's picture


Sat, 05/07/2011 - 16:49 | 1251455 Construct
Construct's picture

Spain is a one of the big countries in Europe with 46m citizens and their main problem was and is high unemployment. But when it comes to national debt (60%) and budget deficits (11) I would say they are not any worse then any other countries. Spain's problem is that to few people pay taxes and to many people are dependant on the state. Like that is not the case in every single country on this planet?

Sat, 05/07/2011 - 16:53 | 1251456 Hugh_Jorgan
Hugh_Jorgan's picture

Eventually, the EU will fall apart as fewer and fewer member states have the stomach for bailing out these imbeciles over and over again. The big nations won't be the first to fall, but they WILL fall eventually as their are unable to finance their existence.

I see ZERO prospects for the future in today's economic fundamentals. The consumer ecomonmy is on it's back because the worlds largest consumer body is broke (US) and will not see economic grow anytime soon. I can only see a system that will have to reset after a series of collapses.

Someone please explain what I've missed here..

Sat, 05/07/2011 - 17:14 | 1251500 Construct
Construct's picture

Germany which benefited the most from EU at the expense of everything else should pay up. If they go broke in the process is not my business or anyone else's either. They wanted EU and they have dominated every other country in EU like Adolf Hitler would have. So the cost is on them. I refuse to pay or contribute in any way shape or form.

Sat, 05/07/2011 - 17:38 | 1251544 magpie
magpie's picture

The price of Empire; the last time for Spain it was losing all of its manufacturing and 30 % of its population, so perpetual bankruptcy and a lower living standard are a lighter burden (that is, already before actually losing your empire).

Sat, 05/07/2011 - 17:17 | 1251512 jm
jm's picture

You have too much fear and not enough hope.  It creates a tunnel vision that doesn't enable you to look outside the box.

Sat, 05/07/2011 - 17:46 | 1251562 AG BCN
AG BCN's picture

ahh "Hope"

jeez jm, I applaud you for trying, you kow it's a tough crowd. At least you give feedback.

Sun, 05/08/2011 - 08:29 | 1252663 newworldorder
newworldorder's picture


I am fascinated by your post, both from a banking as well as a social perspective. By social, I mean at the individual or "mood" level within each country's population concerning the EU. The issue in mind is whether the social union is strong enough to withstand worsening financial conditions IF they materialize, on a country by country level.

At what point does the vision of a new Europe become burdensome at the country level. We are approx., 3 generations removed from WW2 and 1 generation from the fall of the iron curtain. How much more time will the bankers be given to get it right financially, at each county's ballot box, before the concept of the new Europe is rejected by its citizens.

Sun, 05/08/2011 - 08:56 | 1252689 jm
jm's picture

I'm going to get somewhat Yoda on you.

Debt is borrowing from the future.  There has been too much borrowing.  The future will have to sacrifice for the binge.  For some countries, that time is now. Note the inverted yield curves and CDS curves that say that future is not as bright as today.  This diminishment of the future will spread everywhere there is too much debt.

The way to mitigate this future is to steal from present creditors, who are always viewed with venom in these times.  People dont' care about bank excesses until they can't easily pay their obligations.  Seriously, we have ten years of mega bank excess and no regulator or taxpayer said anything until the foreclosures came.  This is no excuse for banks,  But I put the blame on bad interest rate policies and governemnt corruption, human greed in banks and elsewhere, and a body politic that couldn't care less until it high-jakced their wallet.  People who live within theor means and carry injured innocence have yet to accept the relaity of the situation.  IT doesn't do any good to imagine that they will remain unscathed if everyone else goes down.  Shared sacrifice. 

So my frame of reference is larger than banks.  At some point, however far into the future it may be, there will need to be retrenchment:  banks, governments, and people will have forced on them by reality the need to live within their means.  The EU, the US, expert-led economies will all look very different and down-sized.

The hope is there for those who take limited control of their situation and retrench on thier own terms before it is forced on them.        

Sun, 05/08/2011 - 14:06 | 1253239 Highrev
Highrev's picture

I've lived in Spain for 15 of the last 20 years. This is a great post, and I've seen some great comments here and will try to respond and share some of my 1st hand experience - which includes the 100% fluency that is an absolute requirement in order to have the real time “comprehension skills” necessary to communicate, and, ultimately live, on a level that approximates that of a native resident (complete immersion as linguists would say). One of the main things I lack though when put alongside a native is the common historical experience. Imagine what watching Forest Gump would be like if you hadn’t lived in the U.S. during the historical period covered. Foreigners completely fluent in English don’t understand any of the historical references on a psycho-social level (the music being the most telling example). Missing historical experience can be compensated for by reading history, newspaper and magazine articles of the day, etc., but the emotional experience coming from having lived that historical moment can never be captured.

The issue in mind is whether the social union is strong enough to withstand worsening financial conditions IF they materialize, on a country by country level.

Let me answer you with a quick phrase that you could easily come across in private and public regarding the Euro. It goes like this:

The Euro is our salvation.

That's from the common man.

Imagine the political will of that social group.


If you want to begin to have the smallest inkling of what that really means on a psycho-social level, you need to study Spain's history of the last 80 years, and most especially the financial implications felt by the man in the street over that time. Short of being able to do that, we need to rely on 3rd party information, and here we are, doing just that.

I would say that the sentiment is profound and that the majority of Spaniards would view a return to the Peseta as nothing short of apocalyptical. Money would exit the scene at a rate that would make your head spin. Confidence would be crushed. The average Spaniard equates modernity with the European Community which is now embodied in a collective Euro! We all know where Spain was pre-European Community.

The Peseta was the embodiment of what the Spanish themselves derisively call “third would banana republic finance”. South America has a certain repulsion value for the Spanish. The history is there with an explanation for why. You either know these things as a function of being a member of the social group, or by being an expert on the subject (Spanish history, and more precisely, Spanish financial/economic history). Pop quiz here: why have Spanish multinationals so aggressively diversified internationally over the last 20 years? It’s there in their history and began with the politically motivated nationalization of one of the largest companies at that time. They’ve become powerful multinationals as an inadvertent by-product and done so with a mission statement to become as independent as possible from the vaivenes of both the Peseta and the political machinations behind it.

What I get out of the rest of Europe is by way of translation (although I read Portuguese quite well) via the English or Spanish press.  My impression of the English is that they are heavily weighted towards the Euro skeptic view thanks to their cultural baggage more than anything, and that the rest of Continental Europe tends more towards that profound respect felt in Spain (from what I get out of Italy, it’s a similar sentiment held by the common man, and Greece is, my observation here, the odd man out – and I’ve gone on too long to continue here with an explanation for why I think that about Greece).

Again, great post and thread. I’m going to keep reading and review what I’ve already read.


Sat, 05/07/2011 - 16:59 | 1251471 Dick Darlington
Dick Darlington's picture

Wouldn't draw those conclusions from these "market" prices. It's a far far away from free and functioning market. It's like saying US is solvent just because treasuries haven't blown off. Fundamentals are just plain bad and it's not gonna get better any time soon. Classic example how paper prices are nowhere near the economic reality.

Sat, 05/07/2011 - 17:17 | 1251509 jm
jm's picture

The point ot me of the spreads is to show that Spain is no Greece.  Nor is it Portugal.  Bond yeilds will have to rise much higher before they can't service the debt.  More costly, sure.  But not unsustainable.  These are the fundamentals that really matter. 

That's the funny thing about the "probability" of default implied by the spread.  It can change in a heartbeat.

Sat, 05/07/2011 - 17:31 | 1251531 Dick Darlington
Dick Darlington's picture

Yeah, just like Ireland wasn't Greece and then Portugal wasn't Greece or Ireland. Massive manipulation by ECB slowed the process but eventually couldn't fight the real fundamentals.

Sat, 05/07/2011 - 17:42 | 1251561 jm
jm's picture

Greece public debt/GDP = 105%  

Irish public debt to GDP = 95%

Portugal public debt/GDP = 70%

Spain public debt to GDP = 50%

Markets aren't as stupid as it may appear.

Sat, 05/07/2011 - 17:55 | 1251585 Dick Darlington
Dick Darlington's picture

Remember what the Irish debt/gdp was before the ponzi scheme blew off? And look at it now.  And You see repeated revisions for worse coming in one after another and still believe those numbers are correct? And it's always good to take into account the loopholes in reporting. EDP-compliant numbers from any eurozone govt are not representing the true debt burden. I recommend to read Edward Hugh's blog abt Spain. He has been digging and analysing quite a lot and i find the stuff very refreshing alternative for the "official truth".

Sat, 05/07/2011 - 18:00 | 1251596 jm
jm's picture

Good points.  Read his stuff too.  He does have eyes on the ground.

Sat, 05/07/2011 - 18:16 | 1251615 AG BCN
AG BCN's picture

He is the authority on Spain but at the same time very much a Krugmanite. Make of that what you will.

Sun, 05/08/2011 - 14:18 | 1253271 Highrev
Highrev's picture

Greece public debt/GDP = 105%  

Irish public debt to GDP = 95%

Portugal public debt/GDP = 70%

Spain public debt to GDP = 50%

And to reiterate your main thesis, it's extremely important to differentiate.

Why is Portugal more like Greece? And why don't the Irish fit into that same group? And why is Ireland more like Iceland?

Then one can move on to Spain and Italy who I would put into the same group, but both different from the previous two groups just mentioned.

What are the differences? They are much greater in number and scope than the similarities.

Different problems require different solutions.


Sat, 05/07/2011 - 17:05 | 1251474 bob_dabolina
bob_dabolina's picture

pro tip:

Before investing in any sovereign I complete the following routine. I highly recommend watching the two minute routine if you desire to make it rain stacks of money. Stephen Cohen uses this exact technique before placing any trade.

Sat, 05/07/2011 - 23:42 | 1252258 tom a taxpayer
tom a taxpayer's picture

I guess it gives one a better nose for business. Hilarious.

Sat, 05/07/2011 - 17:16 | 1251479 Use of Weapons
Use of Weapons's picture

The correlation between the Euro and Spanish credit risk shows that Spain is a domino too big to fail.  It is difficult to conceive of a situation where policymakers would say goodbye to their own jobs by permitting a default.

Here's another history lesson.

Spain was the longest lasting Fascist regime in Europe. 1939-1978.

That means that most of the middle generation was born under it, and are still very aware that they're still digging up the bodies. This isn't like the deep south, where the african americans never got a say; this was civil war, and it went on a very long time. This is, remember, a country where ETA bombings and even a [false-flag it was proven later] "Muslim train bomb" failed to get rid of a socialist minded government, or stop them from pulling out of Iraq.

If you think that Spain won't react very badly to bankers pushing it around, or that the entire country isn't the lynch pin [ba-boom] to the European domino affair, then you don't know squat - much like the 'guest poster' there.

Push comes to shove - even the damn King will step in to prevent a re-run of the modern era in Spain, and will provide Europe with a spectacle not seen for a while... Nation states, lead by Kings, fighting against tyranny. Grab the popcorn for that little irony.





"JM" - probable Squid, probably a monikor for...well, missing a P there? I find your analysis lacking in depth or quality, which means you're probably interior to the scam.

Sat, 05/07/2011 - 17:24 | 1251526 jm
jm's picture

Sigh.  All this spew because I have a different opinion. 

Showing you how wide GGB and PGB yields are to Spain's and some market sentiment is more meaningful than some mouth-breather reference to fascism.

Sat, 05/07/2011 - 17:49 | 1251571 Use of Weapons
Use of Weapons's picture

Thinking I don't have gills?

Bottom line: look at the situation with the (prior-to-banking) property bubble, and the actions that the Spanish gov. took against foreign investors [not only years of duel class legislation, but also National/local level reclaimations].

Fact: It took many real estate investors about 20 years to get ownership within Spain [Black & Decker, for instance, who were jumping to invest in there even during Fascist times]; then there's been an entire slew of foreign [usually suck the naive into retirement home scams] builds that are simply being wiped off the plate.

Bottom line - this is where we differ.

You think that a couple of lines on a graph and "market sentiment" is more important than about 50 years of factual behaviour. This is the problem; when the shit hits the fan, you guys are left looking at the graphs wondering why the fuck the market "isn't rational" or "where did that come from". Boo fucking hoo. People aren't rational. Nor is the current economic situation.


Adjust your outlook accordingly, or end up like Mussolini.


Sat, 05/07/2011 - 18:22 | 1251621 jm
jm's picture

How far back in history do you go?  To Muslim Spain?  Is that relevant at all?  It's not because people forget.  Fascism is a wound, but people heal and move on scars and all.  The EU is just as much a part of the historical process that is Spain.

Squiggly lines on graphs aren't the end-all, be-all either.  But they give a view on the concensus prevailing now.  Just sayin'


Sat, 05/07/2011 - 17:30 | 1251535 Keithk
Keithk's picture

Spanish banks have taken all the distressed properties off the developers that cannot pay their loans and have barely written down the values of said properties, cooking the books on a grand scale. The Spanish property bubble wasn't far off the size of Irelands yet their property is down a tiny amount compared to Irelands, the house price index in Spain is calculated by the value estate agents put on properties, like WTF?

Currently Spanish banks are giving out mortgages to people who take the properties they have on their books off their hands, this won't last.

Spanish banks needs 40BN to meet Basel III rules, and that's before they start writing down the property on their books to realistic prices.

Sat, 05/07/2011 - 17:56 | 1251587 Use of Weapons
Use of Weapons's picture


However, note this well: Spain has always functioned a two-tier market in property; Nationals, and then Foreign investment. There have always been two sets of rules, and anyone thinking that they won't simply legislate away & ignore EU rules is extremely naive.

Thus my comments about Fascism.


Anyone who thinks Santander isn't sitting on 200 year old S.American gold reserves is a tool, btw.

Sun, 05/08/2011 - 15:14 | 1253442 Highrev
Highrev's picture


You might also be better off comparing Santander to the Rothchilds.



Sat, 05/07/2011 - 18:00 | 1251592 jm
jm's picture

The countervailing wind is how successful they have been in securitizing this stuff and getting it off book.  Seems Santander has been pretty good at this, don't know about the rest.


Sat, 05/07/2011 - 18:03 | 1251601 Use of Weapons
Use of Weapons's picture

Santander were at the European forefront of obtaining Mexican / S.American liquidity at the height of the crunch*; many US banks did more, but it shows that they still have historical ties with the countries they invaded so long ago.


We hold no doubts of their ability to place entire holdings 'off book', if not directly, certainly indirectly via placements.




*$385 bil total, wasn't it? Probably about twice that, given that figure is pure cash, not holdings.

Sun, 05/08/2011 - 09:27 | 1252730 Daedalus
Daedalus's picture

No. They securitised this stuff and funded a great deal of it through the ECB (vis Bank of Spain). In very very very few Spanish RMBS or CMBS deals was the equity/first loss sold to the market. 

Hence in almost all cases the securitisations remain on Balance Sheet for the banks.

In 2003-2006 Spanish banks did SO MUCH volume of securitisation which they retained for the purpose of repo-ing with the central bank that Investment Banks were PAYING to do the deals because they provide the much desired League Table credits without any underwriting risk!


Sun, 05/08/2011 - 09:41 | 1252745 Dick Darlington
Dick Darlington's picture

Do You know the amount of covered bonds (cedulas) issued just for the purpose of using them as a collateral for ECB funding? I have serious doubts abt the quality of collateral in the cover pools because of the housing bust, complete lack of transparency by the issuers etc. Even Moody's released a report conserning the reporting and transparency issues of spanish covered bonds, of course several years too late but still.

Sun, 05/08/2011 - 12:48 | 1253048 jm
jm's picture

Thx for the info.

E20 billion is provisioned for real estate loans.  Spainish government already has an additional E20 billion in a standby facility, which will of course be run dry.

How much more do you think is needed for E100 billion in problem loans?  This is saying 40% of problem loans will foreclose and the collateral is worthless.

If loss severities are that bad, Germany can suck their own wang.  The ECB is going to do some heavy-duty monetization no matter what they say.


Sat, 05/07/2011 - 17:35 | 1251548 Clowns on Acid
Clowns on Acid's picture

JM...nice info and solid analysis. However a few questions if I may:

What is your timeline for the trade? What are the variables/prices to watch to indicate that the tipping poit of pain has been reached?

  • "The bottom line is cost of funding.  Once it reaches a threshold level, there is just too much pain and default becomes the politically acceptable option.  We are nowhere near funding costs that in Spanish government bonds.  If fact, the relative pricing of synthetic and cash makes for a compelling trade."

Agreed, however given that Trichet/ECB are only bluffing with their recent .25 bps hike and subsequent "hold" at most recent meeting confirms this, one has to realize that real interest rates will coming into focus in regard to probability / timing of default/haircut.

Real interest rates (the inflation variable particularly) can be impacted by factors other than demand and supply or Gov't intervention.  

CDS prices rose violently when illquidity was created by the Credit crunch of 2008. Gov't/Central bank intervention (via massive, moonshot like stimulus, i.e. money printing) encouraged traders to buy CDS again as balance sheet "improvement" encouraged sov debt buying (lower prob of default). All good, as your analysis far.   

However your "Once it reaches a threshold level, there is just too much pain and default becomes the politically acceptable option" requires a discussion of the timeline of this event.

The interest rate side of the real interest rate equation is transacted in a highly organized, electronic, institutional market. The inflation side of the equation contains many markets (soft and hard commodities) that are not as electronic or institionalized, i.e. less liquid. These markets can be highly sensitive to the Societal Trust factor, as price (demand / supply) has a "retail physical distribution" variable not found in the price discovery for inteerst rate paper. Soft commodities (Ags, oil, sugar, etc.,,) prices at the retail level are subject to increased costs of security of retail physical delivery, security of payment for goods shipped, etc, as the Societal Trust factor drops. Increases in the soft commodity retail index directly impacts consumer disposable income and will as a consequence increase housing defaults. The swirling twister of stagflation continues downward as does the Societal trust factor.

Any additional "stimulus"/ money printing by Central Banks just remains on banks and corporate balance sheets under "Cash and S/T instuments" (see many great articles on ZH in this regard) as the banks don't lend to unsteady balance sheets and corporations do not increase output as the consumer's marginal propensity to consume is discouraged by higher retail commodity prices.

Hoarding of retail commodities maybe the harbinger of the "tipping point" of the pain threshold you allude to. Gov't responses to hoarding usually worsens the situation.

Reports of hoarding of soft comodities are leaking out particularly with rice in Philippines, India, and China (the radioactive Japanese crop doesn't help) and coffee in Brazil, Ethiopia, Vietnam, Columbia, et al.

Hoarding of softs maybe the canary in the gold mine for inflation and subsequent real interest rates to reach the tipping point for PIG(S) default.

The Societal Trust factor will be driven lower with the upcoming US presidential elections 1.5 years away, as polarization increases, and subsequently impacts global societal polarization.

Do these observations/ opinions have any place in your analysis for default timelines of the PIGS and your Spain CDS trade?

Thanks again for your thorough analysis.   


Sat, 05/07/2011 - 18:10 | 1251606 jm
jm's picture

Thx for your comments, but the praise is disproportionate to what I did here.

There's no sure things.  Take away the modesl and math and you have to have a view you are comfortable with.  Define clearly P&L, set closing targets.

The trade I was talking about is convergence between cash and synthetic.  

Simpler trade:  When CDS spreads blow out, STD craters.  Buy STD then.  They get more revenue from South America than Spain now.    

Sat, 05/07/2011 - 17:39 | 1251553 kito
kito's picture

spain is great. tapas delicious. 

Sat, 05/07/2011 - 18:12 | 1251610 edmondantes
edmondantes's picture

Dreaming.  Spain is bankrupt.  There are more unsold newbuild apartments available than were built in the entire period between 2002 and 2010.  Spanish banks are looking at €300-€450bn of losses. Property prices have been kept up through extend and pretend, legal forbearance and transfer payments from the government.  The losses can be put on the sovereign balance sheet, or (more likely) from further moneyprinting by the ECB.

Sat, 05/07/2011 - 18:28 | 1251624 Use of Weapons
Use of Weapons's picture

What disturbs me here is that no-one is even attempting to figure in the "grey economy". Spain's cut of that is circa $20-40bil a year, and is costed in via Santander. To the stupids: at the height of the crunch, the banks laundered (direct) $385 bil to get liquidity. I'll make this simple for the audience: when the tough times hit, the banks directly laundered, no questions asked $385 billion in drugs money in the period of 7 weeks to regain direct liquidity.

Oh, wait.. guessing no-one here noticed the poppy yeilds pre-post Afganistan invasion, or that troubling figure that the CIA actually gave the Taliban $40 mil to keep on producing it?

Afghanistan now supplies over 90 percent of the world’s heroin, generating nearly $200 billion in revenue. Since the U.S. invasion on Oct. 7, 2001, opium output has increased 33-fold (to over 8,250 metric tons a year).


This is what I find amazing about the pundits - the gill breathers are the worst for this: So stunned that the system isn't working; so stunned when the system works with grey/black economy adding value and so stunned the game isn't fair.

And you wonder why the O.D.O's despair and want it run differently?


Economics 101 - if you're not costing in all variables, then your data is tripe.


Now fuck off, all of you "pundits", and start dealing with real economics, shall we? If you're an amphibian, this is the time to back off, "JM".

Sat, 05/07/2011 - 18:27 | 1251632 jm
jm's picture

Cajas have combined E250 billion exposure to real estate total.  Where do you come up with some E300-E450 billion in losses?


Sat, 05/07/2011 - 18:27 | 1251635 Use of Weapons
Use of Weapons's picture

Mixed reply - that q'tion is to the poster above.


Mine is about the global grey / black economy "being priced in", and pundits failing / ignoring / wetting themselves when it is.


But ye... doubting you'll actually answer my question, you little frog.

Sun, 05/08/2011 - 15:29 | 1253471 Highrev
Highrev's picture

I can corroborate jm's numbers.

And I agree with his analysis in general terms.

I can also say that the over supply of real estate stock is also real, and real big, but there still are no distressed sellers, and as long as that is the case, prices will remain "relatively" stable (which allows the banks to book the figures they do, while, ahem, ahem, they increase reserve loss ratios). They're in a world of hurt, just like everyone else, but they're not the lynchpin by any means (there are others much worse). Bernanke is a much greater threat, and a much likelier lynchpin to the abyss.

BTW, there are plenty of Northern Europeans frothing at the mouth to "pick up bargains". Let's be real, the Iberian Peninsula is the California (as it was 40 years ago) of Europe. That's where Northern Europe plans to retire!


Sat, 05/07/2011 - 18:25 | 1251633 Reese Bobby
Reese Bobby's picture

Tail wagging the dog...

Sat, 05/07/2011 - 18:38 | 1251652 Yancey Ward
Yancey Ward's picture

I don't know, Spain looks like Greece did in late 2009.

Sat, 05/07/2011 - 18:36 | 1251653 Clowns on Acid
Clowns on Acid's picture

JM..perhaps disportionate praise but you did give solid analysis to support your trading / convergence idea (as opposed to a rant).

Ok, as a cross asset trader I look for harbingers for correlations breaking down. Correlations between softs and pm commodities have been reasonably strong lately.

Like the STD story because of commodity prices and Brazil / Latin America, but banks are a story I cannot stomach at the moment.

Good luck with your trade. Cheers.  

Sat, 05/07/2011 - 19:08 | 1251695 jm
jm's picture

Here's some thoughts on correlations.  when they break, nobody knows what is going to happen. In a sense correlations "reset"... they grope around reinventing themselves in possibly different ways.

That said, I observe: 

Bond vol < currency vol < equity vol < commodity vol.

I've also noted that sovereign CDS spreads correlate strongly to bank equities domiciled there with a lead.  It may be a small lead, but it is there. 

I imply from this that bonds process information more efficiently than other assets do, so I keep an eye on even small moves in credit.  They tell you what is going to happen in a bigger way down the ladder.

Sun, 05/08/2011 - 15:38 | 1253519 Highrev
Highrev's picture

For what it's worth Clowns, I think risk is off, that nominal new recovery highs are possible, if not probable, in select European and U.S. equity markets in a rebound that will amount to a selling opportunity. Others like the RUT, SOX and BKX (for example) just might give us early warnings in the form of non-confirms. My thinking is that intermediate term highs are in when talking about the commodity complex in general (without excluding the sell spike rebound of course - just don't think we see recent highs eclipsed there). Bonds and USD up. Correlations alive and well, Bernanke gets a very needed opportunity to unload some of his UST holdings, and Europe sells more of its debt, as does Japan . . .

Sound logical? The technicals (as I interpret them) seem to be saying that what's in the works.

Sat, 05/07/2011 - 19:04 | 1251690 tom
tom's picture

Not one single word or chart here that even tries to begin to show that Spain isn't in trouble. The heart of the matter is the real economy. The unemployment is too high and stagnant/growing, GDP is too low and stagnant/declining, and the labor force too uncompetitive, to make money good Spain's public and private debts. Default is inevitable, regardless of whether or not it will be preceded by the desperate delay tactic that goes by the name of bailout.

Sat, 05/07/2011 - 19:04 | 1251693 DNB-sore
DNB-sore's picture

I know there is a country called Finland but the fact is that Finland almost never hits headlines for being progressive (not in our media for years and years). In my profession Finland does make some kind of headlines based on a time 50 to 60 years ago and todays that time is still hot because the banksters and their derivative employees like to stuff their homes with furniture designed by Tapiovaara, Kakkapuro among others through auction houses and european dealers. Also there are some amazing ralley car drivers with difficult names. Otherwise I did not see a country doing some special moves the last 20 years, am I wrong

Sat, 05/07/2011 - 19:28 | 1251733 buzzsaw99
buzzsaw99's picture

One thing is certain. The banksters will take a bonus and the taxpayers will foot the bill.

Sat, 05/07/2011 - 19:59 | 1251779 DNB-sore
DNB-sore's picture

I have a lot of concerns moving onwards bacause my suppliers are going bankrupt the last 6 months, some have been refinanced so business can go on. Retailing in europe is going to be more domestic

Sat, 05/07/2011 - 20:07 | 1251789 Atomizer
Atomizer's picture

SHTF is now been redefined as SHTW. Government subsidized green energy meets shit.

Sat, 05/07/2011 - 20:18 | 1251807 Hephasteus
Hephasteus's picture

I heard those windmills only cost 5 dollars to dig out of the ground.

Sat, 05/07/2011 - 20:47 | 1251879 Atomizer
Atomizer's picture


Sun, 05/08/2011 - 00:51 | 1252381 FeralSerf
FeralSerf's picture

Are they the ones that the Man of la Mancha killed?

Sat, 05/07/2011 - 21:43 | 1252005 Sukumvir
Sukumvir's picture

In addition to all the NPL's held by the regional cajas/savings bank; the Achiles Heel of Spain is the huge amounts of debt held by the Regional Autonous Governments and so far kept under the rug through public sector companies; whereby the various Regional Governments are not required by law, to consolidate public sector liabilities held by those very public companies and foundations .

There are regional government elections to be held on May 22. As incumbents are ousted in some regions and former opposition parties take charge, the true extent of "liabilities" kept in public companies/foundations as well as in desk drawers will slowly emerge.

The pace of debt emergence will become a proxy in itself for shaping expectations on all the hidden stuff kept by Zapatero and his cronies at the Central Government.

Take a close look at Catalunya under its new regional President, Artur Mas (or Minus) and all the crap that is now coming to the surface; as he refuses to swallow somebody else's looting of the public purse.

Sat, 05/07/2011 - 22:02 | 1252051 jm
jm's picture

Are these liabilities firewalled like, say California state debt is to the federal government?

Or is the Spanish federal gov obligated to pay for it, like California is to cover a general obligation muni bond?

Sorry if these analogies may not mean much.

Sun, 05/08/2011 - 15:50 | 1253545 Highrev
Highrev's picture

the Achiles Heel of Spain is the huge amounts of debt held by the Regional Autonous Governments

That's correct, but there are also huge differences, with many regions practicing fiscal responsibility (there are even examples of surpluses). Your example of Catalunya is half correct - Artur Mas is actually taking Catalunya further into debt, this year only, to make the long term austerity more palatable, in his words. His party has historical precedent favorable to job creation and consistent with fiscal responsibility so maybe we can take him at his word and it will be just for this fiscal year.

There are also municipal examples like Barcelona and Madrid. Spend thrifts who still haven't got the memo.

And I think we've pretty much covered Spain. ;-)


Sat, 05/07/2011 - 23:17 | 1252216 johngaltfla
johngaltfla's picture

I simply remind everyone of other famous statements (no insult meant to JM):

"Fears about Bear Stearns are overblown"

"Fears about Countrywide are overblown"

"Fears about Vallejo, CA are overblown"

"Fears about Jefferson County, AL are overblown"

"Fears about Hungary are overblown."

"Fears about Lehman Brothers are overblown"

"Fears about Merill Lynch are overblown"

"Fears about Fannie and Freddie are overblown"

"Fears about Ireland are overblown"

I'm just sayin......

Sun, 05/08/2011 - 08:19 | 1252654 jm
jm's picture

I feel like I'm Don Quixote. 

I'll just say that there are ten near-misses that no one remember to every one torpedo hit.

But I respect your examples.

Sun, 05/08/2011 - 09:58 | 1252760 johngaltfla
johngaltfla's picture

jm, it all comes down to cash flow and economic expansion; both of which the Spanish financial system is found lacking. The reason I do not focus on EU based sovereign bond issues is the detail that with the ECB and Fed member banks intervening in the markets and buying those instrutments, it is extremely difficult to determine the true market demand thus real yield of those securities until it blows up.

For example, if ECB member banks (along with the UK banksters) quit purchasing Spanish debt what would the yield soar to? 30, 50, 200 bps above the German benchmark? No one really knows because the ECB is following the example of the Fed and attempting to launder the massive supply through its member banks and probably asking the Fed's members to use their overseas arms to do the same. As long as the supply is flowing through the system and none of the banksters actually have to declare ownership until financial reports are due, these bonds could be purchased, circulate between the con artitists and never have a "home" until the last sucker standing takes delivery of the instruments.

The world is playing electronic financial Ponzi and when the music stops, as TD has been warning, this crap is going to hit the fan at light speed and take several nation's financial systems down with them. The first test will be in July when the UST starts auctions once again without Fed interventionism and a return to the original "Pirates of the Caribbean" model where the banksters hedge funds attempted to purchase 30-50% of each auction to launder throughout the world.

My money is on "no" as far as success and why I think the short end of the curve is predicting another liquidity crisis rather than a supply crisis as the Infomercial Financial Media (CNBC, BLM, FBN, WSJ, etc.) are proclaiming. I think it is time to write another missive on the implications of short term negative Treasury yields.

Sun, 05/08/2011 - 14:40 | 1253087 jm
jm's picture

I agree mostly about cashflow and business cycle being king.  I also think it is important that a people, not a government, make the explicit decision to honor its debt or not.  True, if the former doesn't work then the latter isn't going to be possible.

Greece and Ireland for sure the former isn't working.  The are going to default cuz there is no way to economically service the debt. 

Spain isn't at that point and they have at least shown some politico lip-service in being a part of the responsible club.  May just be lipservice, I know, but I think it is a part of the collective will of the people.  I don't have perfect knowledge. 

Plus, Spain is able to borrow at servicable rates.  The ECB is going to kick the can when needed  and they can kick it far.  The world won't always be in recession, and so I balance the coming short term horrors against a longer view.       



Sun, 05/08/2011 - 16:09 | 1253575 Highrev
Highrev's picture

Thursday the Euro tanks and takes with it the European majors.

The IBEX-35 held support. Friday cash breaks that support but futures hold. Rebound into the close on Friday as the Euro continues to tank?


The Euro tanked on the news that the ECB didn't "follow through" on April's hike.

That was very good news for the periphery where economic growth is most anemic.


Add: They're walking the fine line. As jm says, they're kicking the can, and I agree that they might be able to pull it off. Judge one by his/her acts. Europe has actually done something to address their issues, and the prospect of success is feasible. Looking around the globe, I think we can find examples of kick the can without any effort to address the underlying issues at all.

Who are you really going to bet on? The boxer who actually trains, or the one who just spouts hot air?


Sun, 05/08/2011 - 03:06 | 1252490 Sukumvir
Sukumvir's picture

Regional Government debt has historically been guaranteed by the Sovereign.

Following the collapse of the housing bubble and its associated tax windfalls to Regional Governments and Municipalities, the Central Government had no choice but to keep issuing guarantees for all the incremental borrowing by the regional autonomous government up until this time last year when Merkel& et al. got on Zapatero's case.

That's close to four years of unadulterated borrowing binge, where the regional politicians would tap the Cajas as if they were their own Central Bank source of QE juice, to keep up with their lavish lifestyle and patronage network.

As a result of Merkel's direct supervision and a direct phone call by Obama himself to Zapatero asking his buddy to reign  Regional borrowing, Catalunya and Valencia had no choice but to refinance principal by issuing Patriotic Bonds silently guaranteed by yet again, Zapatero himself! 

It appears the Central Government is not issuing any more guarantees and somehow Regional Governments are barely keeping up with civil servant payroll payments after firing adjunct (sackable) civil servants.

The one and only guy/economist with a fair command of numbers/shadow stats on Spain is Roberto Centeno, a former energy top executive, who is a regular host at radio and TV programs.



Sun, 05/08/2011 - 07:59 | 1252642 disabledvet
disabledvet's picture

CDS nothing more than an insurance policy so looking at the chart basically means nothing as we all know from the real estate bubble.  (the Great Moderation.)  Moreover euro-land is now going toe-to-toe with "the Market."  that means volatility--and includes bear raids.  good luck finding a history of "bear raids" on actual countries!  welcome to the sovreign variant of the "new new thing."  only problem is "when dealing with countries ain't nothing new going on there." we shall see how serious the slowdown in the USA and Japan really is:  clearly it's going to have a massive impact on europe.

Sun, 05/08/2011 - 10:35 | 1252806 Sukumvir
Sukumvir's picture

I can't find the link now, but someone posted a recent interview by newspaper Heraldo de Aragon with Zaragoza's mayor; Juan Belloch, former interior and justice minister un Felipe Gonzalez.

Belloch is bound to be be reelected for a third or fourth term, so he can afford to say things others won't dare.

He is saying that once the election is over after May 22nd, econ minister Elena Salgado will have no choice but to extend credit lines to the vast majority of spanish municipalities (including his own-read also regional governments) by tapping ICO funds.

ICO being the (Official Credit Institute). Source of funds? guessed it. Sovereign lending by those who believe Spain is not that big a risk!



Sun, 05/08/2011 - 11:10 | 1252845 zippy_uk
zippy_uk's picture

I think the market will wait for the "Second" bailouts of Greece, Ireland and Portugal before the next pig takes its wings...

Sun, 05/08/2011 - 13:45 | 1253189 jmc8888
jmc8888's picture

ROFL Spain is in the WORST shape in Europe. 

Their size, their exposure to some of the worst crap, plus a U.S. style housing bubble. 

They're fucked, bye-bye Inter Alpha.  Brazil is fucked, and they can't just keep raising rates. 

What would Spain and spanish banks be looking like if Brazil's central bank was paying the banksters in federal reserve interest rate levels?

Calling Spain a too big to fail, doesn't mean it is too big to fail.  What a fucking moron.



Sun, 05/08/2011 - 13:49 | 1253203 jm
jm's picture

Thanks, mom.  Happy Mother's Day.

Mon, 05/09/2011 - 01:18 | 1254697 Element
Element's picture
Fears About Spain Are Overblown


Yeah, same said Dubai and Greece and Ireland and Portugal ... all those were 'overblown' too ... or some other verbal term of delusion that was used for them ... until inevitable debt tsunami matured ... then they were all patently underblown ...

Just remember that Ireland looked the least likely to default 1 year ago.

Check back in 12 months ... and bring your dominos ...

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