Why Does Everyone Believe Spain Is About To Run To the EU/IMF For Help? It’s Math, Not Speculation!

The EU Denies Planning
Spain Credit Line with IMF, US, although rumors and leaks are
propping in more places that a Swiss damn being plugged with a bunch of
slender, fair fingers of those many blond maidens – after all, Greece
did not want and was not looking for aid either. That trillion dollar
bailout fund was the result of a bunch of politicians with too much
money on their hands having absolutely nothing else to do with their
time.

Cliff Wachtel gathers much of the evidence:

After 2 German newspapers reported
that Spain was seeking aid, now add a Spanish newspaper, El
Economista, as the third to report a coming aid package for
Spain, after 2 German papers reported this last week. All reports have
been denied by the Spanish Government, which is rapidly losing
credibility as the reports build. See details here
from Bloomberg.

Yesterday, the German newspaper
Frankfurter Allgemeine, citing an unnamed source in Berlin, reported
that Spain was discussing a bailout with EU officials following last
week’s freeze in interbank lending as markets have lost confidence in
the Spanish banking sector. Spain denied the report, did Greece had done the same thing earlier, so EU
credibility isn’t what it once was. If the allegations prove true, look
for A LOT more downside in risk markets. This was the second such
report, the first was last week from from FT Deutschland

Remember that just last week Spain
had a 3 year bond sale at an average yield of 3.32%, roughly double
the yield needed to sell 3 year bonds as recently as April, an ominous
sign given that Spain needs to sell about € 25 bln in bonds in July. It
is unclear how long Spain can continue to withstand a doubling of its
borrowing costs, which will counteract efforts to cut its deficit.

Cliff provides significantly more anecdotal evidence of an impending
Spanish bailout in the link above. I harped on the increase in expenses yesterday:

As you can see, Spain’s 3 yr CDS spreads are the highest they have
ever been. They are significantly higher than they were during the
entire Lehman fiasco, and they are even higher (or at least comparable)
than they were right before the EU/IMF trillion dollar bailout package
was announced in conjunction with threatening those who dared to
speculate against Spain’s fiscal health!

As for the EU denying a bailout package, well we at the BoomBust have
shown where their credibility stands…

As an addendum to the subscription download that picks apart Spain’s
public finances ( Spain public finances projections_033010)

,  I have created a multiple scenario Spain restructuring analysis
consisting of a combination of haircuts and restructurings in order to
give a picture of potential losses to bond investors and potential gains
to Spain. The methodology goes as follows:

All figures in billion euros
		No haircut on principal amount			Involving haircut on principal amount
	No restructuring	Restructuring 1	Restructuring 2	Restructuring 3	Restructuring 4	Restructuring 5	Restructuring 6
Explanation	No extension of maturities and no reduction in coupons	Restructuring by doubling the maturity for bonds due from 2010 to 2020 and coupons are kept the same	Restructuring by doubling the maturity for bonds due from 2010 to 2020 and coupons are reduced by 50%	Rolling up all of Spain’s bonds due to mature between now and 2020 into one bundle and exchanged against a single, self-amortizing 20-year bond with coupon equal to 50% of the average coupon rate of the converted bonds	Restructuring by doubling the maturity for bonds due from 2010 to 2020 and coupons are kept the same	Restructuring by doubling the maturity for bonds due from 2010 to 2020 and coupons are reduced by 50%	Rolling up all of Spain’s bonds due to mature between now and 2020 into one bundle and exchanged against a single, self-amortizing 20-year bond with coupon equal to 50% of the average coupon rate of the converted bonds

Looking at the funding requirements Spain will have in the near
future, even with the IMG/EU bailout, it looks as if there may be a
restructuring in Spain’s future.

Let it be known that our calculations show that while the Spain to Spanish
bondholders will hurt alot, it is not as severe in many scenarios as it
is for Greece. The catch is that there is so much more pain to go around
due to the amount of Spanish debt outstanding as compared to that of
Greece. This does not seem to have the possibility of ending pretty.
Remember the damage done to the highly levered banks with just a slight
devaluation of Greek debt in How Greece Killed Its Banks:

The gorging on quickly to be devalued
debt was the absolutely last thing the Greek banks needed as they were
suffering from a classic run on the bank due to deposits being pulled
out at a record pace. So assuming the aforementioned drain on liquidity
from a bank run (mitigated in part or in full by support from the
ECB), imagine what happens when a very significant portion of your bond
portfolio performs as follows (please note that these numbers were
drawn before the bond market route of the 27th)…

The same hypothetical leveraged
positions expressed as a percentage gain or loss…

When I first started writing this
post this morning, the only other bond markets getting hit were
Portugal’s. After the aforementioned downgraded, I would assume we can
expect significantly more activity. As you can, those holding these
bonds on a leveraged basis (basically any bank that holds the bonds)
has gotten literally toasted. We have discovered several entities that
are flushed with sovereign debt and I am turning significantly more
bearish against them. Subscribers, please reference the following:

• Leveraged European Entities from a
  Sovereign Risk Perspective – retail
  
• Leveraged European Entities from a
  Sovereign Risk Perspective – professional

Professional subscribers (click here to subscribe or upgrade) should reference “The Spain Sovereign Debt Haircut Analysis
for Professional Subscribers”.

Comments

[whiteshadow]

mr. Reggie,

as usual feels good to read your reports....your 6 pack beer is gettin warm ..when do i get to see you?? n intern?? been waiting ......waiting,,,,,

[Hdawg]

i've chosen my bloodline.

what's yours?

[Grand Supercycle]

As mentioned earlier, the EURO daily chart is giving bullish signals but the important weekly chart remains bearish.

The proprietary indicators I use in my technical analysis can identify trend changes before they occur.

http://stockmarket618.wordpress.com

http://www.zerohedge.com/forum/latest-market-outlook-1

[Rogerwilco]

All reports have been denied by the Spanish Government, which is rapidly losing credibility as the reports build.

Great article. Like Bismark said, "Never believe anything until it has been oficially denied". The only question now is how much, and who will be the sucker(s) funding the bailout.

[DosZap]

Rogerwilco
Germany said they & France would............

[Otherspeoplesmoney]

Leo?

[stormsailor]

let the european euro games continue.

reggie middleton is one of the brightest, most informed, and articulate source that i read.

[butchee]

Will Switzerland's one nil defeat of Spain in the world cup simultaneously embolden both the SNB to intervene in the Swissie/Euro pair and the CDS "wolves" to counterattack the Spanish bond market?

[Double down]

There be dragons here

You do great work Reggie.