The following is an excerpt from my most recent issue of Private Wealth Advisory, my newsletter for private clients.
The big news that the markets are attempting to digest this week is the €100 billion Spanish bailout. This action and the upcoming Fed FOMC meeting on June 19-20 will dictate the market’s action over the next two weeks and possibly for the remainder of the year.
The first of these topics, the Spanish bailout, is an extremely complicated affair. The key takeaway issues that need to be considered are:
- How the bailout was performed: who was involved and who wasn’t.
- The details of the bailout structure itself.
- The financial implications of the bailout.
- The political implications of the bailout.
Let’s dive in.
Spain has been denying the need for a bailout for months now. Indeed, a mere two weeks ago, Prime Minister Mariano Rajoy stated that Spain would not need outside assistance. In fact, when France’s President Francois Hollande implied that Spanish banks might need outside funds at an EU summit last month, Rajoy retorted, "Hollande does not know the state of Spanish banks,"
What’s peculiar about this statement was that it was made when the Bankia nationalization was already underway. Indeed, two days after Rajoy’s comment, Bankia asked Spain for €19 billion in bail out funds.
So we now know that’s Spain’s political leaders will lie right up until the point of systemic collapse. We also know that both Spanish banks and politicians are highly incentivized to not quantify the true extent of the risks inherent in the Spanish banking system (remember, Bankia was discussing paying its dividend in April… just one month before it requested a bailout and revised its 2011 €309 million profit to a €3 billion loss).
Thus, I would change the common phrase applied to the EU’s political/ financial policies from “extend and pretend” to “lie until you are about to die.”
This notion is illustrated by the fact that on May 28th, a mere week before Spain requested a bailout, Prime Minister Rajoy continued to maintain that Spain would not need a outside funding, stating, "there will be no rescue of the Spanish banking sector."
At this point, Bankia had already requested its bailout and Spanish banks’ shares were in a free-fall. Moreover, Spain itself was just days away from requesting outside aid from the EU.
The timeline says it all:
- May 9th: Bankia requests €4.5 billion loan, Spanish Government states that the bank is “solvent.”
- May 21st: Spain meets Bankia’s request for loan and takes a 45% stake in the bank thereby instigating a partial nationalization.
- May 23rd: Bankia’s bailout needs grows to €11 billion/ Rajoy retorts to France’s Hollande, "Hollande does not know the state of Spanish banks."
- May 24th: Bankia’s bailout needs grow to €15 billion
- May 25th: Bankia’s bailout needs are now €19 billion (2011 profits revised to €4 billion loss)… the Spanish Bailout Fund has just €5 billion in cash.
- May 28th: Rajoy comments, "there will be no rescue of the Spanish banking sector."
- Weekend of June 8-10th: Rajoy texts to his finance minister: “Aguanta, we are the fourth European power. Spain is not Uganda… If they want to force the rescue of Spain, they need to start getting ready €500 billion and another €750 billion for Italy, which will have to be rescued afterwards.”/ Spain informally asks for €100 billion bailout/ EU Finance Ministers OK the bailout.
- Sunday June 10th: Rajoy states that the bailout is a “victory” before commenting, "This year is going to be a bad one: Growth is going to be negative by 1.7 percent, and also unemployment is going to increase."
Thus, in just one month’s time, Spain implements the largest bank nationalization in its history and requests €100 billion from the EU to recapitalize its banks. And yet, throughout this time, Spanish politicians maintain that Spain’s banking system is “solvent” or in great shape… right up until they get the €100 billion at which point the truth comes out: “This year is going to be a bad one.”
As I said before, “Lie until you are about to die.”
With that in mind, I fully believe the EU is on the verge of a systemic collapse. How can a €100 billion bailout for (from a currently non-existent entity, the ESM, no less) save Spain when even its Prime Minister admits the real needs could be in the ballpark of €500 BILLION.
Ignore this week’s move, this is just the usual options expiration nonsense. The Spanish bailout (assuming it even occurs) has done nothing to address the underlying problems in the EU banking system (hence why Spain’s CDS and 10 year bond yields continue to explode higher).
On that note, if you’re not preparing for the collapse of the EU’s banking system, you need to do so now. 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.
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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.
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