Sovereign Debt

Spain marks the fourth bailout during this Euro Zone debt crisis saga, after Ireland, Portugal and Greece, and may need more aid, while Italy is looking good to be the fifth bailout candidate

For those of you that keep waiting for some giant change-the-world event; I invite you to re-gear your perspective. Greece has fallen, Portugal has fallen, Ireland has fallen and now Spain has followed the road into Purgatory. These are significant events that are, in fact, changing the world though none has caused Armageddon to date though they may by their aggregate but not singular importance. This is also why Greece is of such key importance; it has nothing to do with staying in or out of the Euro or of the preservation of the European Union as a political entity. That part of the equation is barely relevant. What is of critical importance though is that if they leave the Euro that they will default on some $1.3 trillion in total debt that can be afforded by no one. That is the rub and you may ignore the rest of the Eurospeak that is bandied about from Brussels to Berlin. A default by Greece will bankrupt and cause re-capitalization at the European Central Bank, it will throw the IMF into a tailspin and it will play havoc with Target2 and the German Central Bank. Do not allow yourself to be taken in and mis-directed; this is THE issue and the only issue of real importance.

And another bank does a book report on our Saturday post explaining the Spanish bank bail out. At this point, it should be all too clear how Spain's only solution to being in a very deep hole is to keep on digging.

So far we have yet to read even one analyst commentary on the Spanish bailout that sees it as favorable on the margin. The following note from SocGen's Ciaran O'Hagan is no exception: "Will this be good enough to immunise Spain over the Greek elections and fend off more rating downgrades, on the back of greater subordination and moral hazard? Probably not."

While details are largely missing in the aftermath of yesterday's historic announcement from Spain, the one thing that we did catch inbetween the various conferences and announcements, and probably the most important thing, is that the ESM/EFSF funded bailout loan, whose use of proceeds will go to fund the FROB, not one which will rank pari passu with the FROB, will have "terms better than market" - always a code word for priming and cramdown of other debt classes. Today, we learn that this is precisely the case, and the worst case outcome from Spain's pre-primed sovereign creditors.

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. 

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.

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.

The wind picked up across the plains, the windmill began to turn and “The Ingenious Gentleman Don Quixote of La Mancha” rode out once more to do battle. The ever faithful Sancho Panza, not wishing to be left behind, was in attendance and the windmills were now the banks and the regional debt of the country. You see, the Troubadour, Mariano Rajoy, does not wish the country to take any responsibility. It is to be the banks, not to injure the pride of the nation, that are the culprits and the banks, run by the empanada consortium, who are to be blamed. The IMF has released a statement claiming the banks need about $46bn which is the typical posture of the IMF these days; underestimating liabilities and then finding that more money is needed later; which they already knew of course. “Under estimate the liabilities and over estimate the assets” is the mantra sung at the IMF these days at the morning prayers as their credibility is as certain as the stature of the giants fought by Don Quixote. The extra money, suggested in the IMF report to ring wall the banks, is another gust of wind as it is directed to the regional debts of course which no one wants to mention as the faceless Men in Black ride into Madrid to claim their latest victim. The beating of chests can be heard in Andalusia as there is no ESM; it does not yet exist regardless of the panderings of the savants that ride the airwaves. Germany has not even voted on it yet so that that ballyhoo that the ESM is the “Saving Grace” is the stuff and fluff from which nonsense is composed.

Reports citing European sources state that Eurozone finance ministry officials, followed by finance ministers themselves, will hold conference calls on Saturday. A formal request for Spanish EFSF/ESM/IMF support, solely for the purposes of bank recapitalization, could be announced after these calls, and appears to be the motivation for them. As JPMorgan notes, while the timing of such a request would come as something of a surprise, the substance does not. A key question is whether this request for external support will serve to improve conditions in the Spanish bond market and raise Spain's chances of avoiding a broader support package. Our best guess is that it will not as JPMorgan believe that this is merely a stepping stone to a broader package of support for Spain and that the request for support has at least three negative consequences.

A week ago, Zero Hedge first presented the now viral presentation by Raoul Pal titled "The End Game." We dubbed the presentation scary because it was: in very frank terms it laid out the reality of the current absolutely unsustainable situation while pulling no punches. Yet some may have misread the underlying narrative: Pal did not predict armageddon. Far from it: he forecast the end of the current broken economic, monetary, and fiat system... which following its collapse will be replaced with something different, something stable. Which, incidentally, is why the presentation was called a big "reset", not the big "end." But what does that mean, and how does one protect from such an event? Luckily, we have another presentation to share with readers, this time from Eidesis Capital, given at the Grant's April 11 conference, which picks up where Pal left off. Because if the Big Reset told us what is coming, Eidesis tells us how to get from there to the other side...

While not quite Biderman-rant-worthy, Stratfor's more-attractive-than-Charles Kristen Cooper provides a brief and clear explanation, in this clip, of why the creation of a European banking union, which seems to be the cure-du-jour, will do little to help the eurozone's ongoing crisis in the short-term. The degree of political integration required in order to agree on such a solution will take years to conclude in her opinion with the various constituencies all with different levels of urgency and time-horizon. The sad truth is that while focusing on yet another grand plan will make the leaders of Europe appear as though they are doing 'something' (to themselves and others), a banking union in and of itself does little to solve the raging unemployment and more specifically the distrust of Spanish banks. The idea of a banking union is not new (where Berlin would share liabilities for deposits held by Spanish banks, for example, and in return would enable an integrate supervisor of the financial sector - some sovereignty give-ups), but as Kristen concludes: "How long can the eurozone's political elite focus on long-term solutions concerned with sovereign debt and banking bailouts before a genuine social crisis emerges."

First it Egan-Jones (of course). Then S&P. Now Fitch (which sees the Spanish bank recap burden between €60 and a massive €100 billion!) joins the downgrade party of rating agencies that have Spain at a sub-A rating. Only Moody's is left. What happens when Moody's also cuts Spain from its current cuspy A3 rating to sub-A? Bad things: as we explained on April 30, when everyone has Spain at BBB or less...

• China Cuts Interest Rates for First Time Since 2008 (Bloomberg)
• New Risk to Europe's Growth: Banks Cut Lending to Cities (WSJ)
• Labor Faces New Challenge - Losses in Wisconsin, California Come as Ranks of Government Unions Decline (WSJ)
• Yellen argues for more Fed easing amid Europe risk (Reuters)
• Americans Cling to Jobs as U.S. Workforce Dynamism Fades (Bloomberg)
• Japan’s LDP Agrees to Talks With Noda’s DPJ on Sales Tax (Bloomberg)
• Korean Buying Spree Boosts Brent Price (FT)
• China Delays Bank Capital Rule Tightening as Economy Slows (Bloomberg)
• China CIC Chief Sees Rising Risk of Euro Breakup (WSJ)

That former San Fran Fed chairman Janet Yellen would demand more easing is no surprise: she used to do it all the time. That Fed Vice Chairman, and Bernanke's second in command, Janet Yellen just hinted that she is "convinced that scope remains for the FOMC to provide further policy accommodation either through its forward guidance or through additional balance-sheet actions", and that "while my modal outlook calls for only a gradual reduction in labor market slack and a stable pace of inflation near the FOMC's longer-run objective of 2 percent, I see substantial risks to this outlook, particularly to the downside" is certainly very notable, and confirms everyone's worst dream (or greatest hope assuming they have a Schwab trading platform or Bloomberg terminal) - more cue-EEE is coming to town.