The following is an excerpt from my most recent client letter.
In case you missed it, Spain just gave the entire world a glimpse of what’s happening “behind the scenes” in the financial system.
I am of course referring to the Bankia nationalization, the largest bank nationalization in Spain’s history.
Bankia was formed in 2010 when the Spanish Government merged seven insolvent cajas So it’s no surprise that Bankia was a trainwreck waiting to happen… at least to anyone with a working brain.
However, both the bank and the Spanish Government decided to maintain the charade that the bank was in great form right up until it collapsed (only one month ago Bankia was talking about paying its dividend).
On May 9th the Spanish Government stepped in to nationalize the bank. Its first step was to convert its (the Spanish Government’s) €4.5 billion worth of preferred shares to common shares, thereby taking a 45% stake in the bank.
Then Bankia announces €17 billion of new write-downs as well as €7 billion of mark-downs on investments, thereby rendering the bank insolvent. It also revised its 2011 results from a €309 million profit to a €3 billion LOSS.
The end result… Bankia just received a €19 billion Euro bailout, the largest in Spain’s history. That’s not the problem however. The REAL problem is that Spain itself is broke…
…so where is the €23.5bn for the Bankia rescue going to come from? The state's Fund for Orderly Bank Restructuring (FROB) is down to €5.3bn, and there are many other candidates for that soup kitchen.
Spain must somehow rustle up €20bn or more on the debt markets. This will push the budget deficit back into the danger zone, though Madrid will no doubt try to keep it off books – or seek backdoor funds from the ECB to cap borrowing costs. Nobody will be fooled…
The Centre for European Policy Studies in Brussels puts likely write-offs at €270bn. We could see Spain's public debt surge into triple digits in short order.
As I wrote in my column this morning, the Spanish economy is spiralling into debt-deflation. Monetary and fiscal policy are both excruciatingly tight for a country in this condition. The plan to slash the budget deficit from 8.9pc to 5.3pc this year in the middle of an accelerating contraction borders on lunacy.
You cannot do this to a society where unemployment is already running at 24.4pc. Either Europe puts a stop to this very quickly by mobilising the ECB to take all risk of a Spanish (or Italian) sovereign default off the table – and this requires fiscal union to back it up – or it must expect Spanish patriots to take matters into their own hands and start to restore national self-control outside EMU.
In addition to this, Spain’s regional governments are seeking bailouts:
Spain's Catalonia seeks government help to pay debt
Spain's wealthiest autonomous region, Catalonia, needs financing help from the central government because it is running out of options for refinancing debt this year, Catalan President Artur Mas said today.
"We don't care how they do it, but we need to make payments at the end of the month. Your economy can't recover if you can't pay your bills," Mas told a group of reporters from foreign media.
A spokesman for the Catalan government later emphasised that Mas was referring to payments that must be met routinely each month and not a specific deadline this month.
The debt burden of Spain's 17 highly devolved regions, and rising bad loans at the country's banks, are both at the heart of the euro zone debt crisis because investors are concerned they could strain finances so much that Spain, the currency bloc's fourth biggest economy, will need an international bailout.
Catalonia, which represents one fifth of the Spanish economy, has more than 13 billion euros in debt to refinance this year, as well as its deficit.
All of the regions together have 36 billion euros ($45 billion) to refinance this year, as well as an authorised deficit of 15 billion euros.
Last year many of the regions financed debt by falling months or even years behind in payments to providers such as street cleaners and hospital equipment suppliers.
Thus, Spain has illustrated the true nature of the EU Crisis in just one week. Specifically…
- Both governments and banks are lying about the real risks to their balance sheets (Bankia passed the EU’s stress tests).
- We have reached the point at which Governments can no longer bailout their own failing banks as the Governments themselves are bankrupt (see Catalonia and Spain as a whole).
To recap… Spain has only €5 billion left in its own bailout fund… at a time when its largest bank needs €19 billion (at the least)… and its regional government have begun asking for bailouts too.
Oh, and the Spanish banking system needs to write off another €270 billion… if Spain cannot cobble together €19 billion, where on earth will it get the money needed to support its collapsing banking system which is on the verge of having to write down hundreds of billions of Euros?
This is the state of affairs in Europe: bankrupt nations trying to bailout bankrupt banks or looking for bailouts from funds that are backed by other bankrupt nations.
What could go wrong?
On that note, Spain will take down the EU, guaranteed. I’ve been warning about this for months and everything is unraveling exactly as I forecast. So if you’re not preparing for an end to the EU in its current form as well as a European banking collapse, you need to get moving.
I recently published a report showing investors how to prepare for this. It’s called How to Play the Collapse of the European Banking System and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.
This report is 100% FREE. You can pick up a copy today at: http://www.gainspainscapital.com
PS. We also feature numerous other reports ALL devoted to helping you protect yourself, your portfolio, and your loved ones from the Second Round of the Great Crisis. Whether it’s a US Debt Default, runaway inflation, or even food shortages and bank holidays, our reports cover how to get through these situations safely and profitably.