CNBC Asks, "So Why Are Spanish Bond Yields Falling?" I Ask The Better Question, "Why Are Spanish Banks Considered Solvent?"

Reggie Middleton's picture

CNBC asks So Why Are Spanish Bond Yields Falling? Well, that's a good question. Short answer: Well rates spiked dramatically, and we are seeing some retracement from the psychological balm of even more liquidity thrown from the global central planning cartel, otherwise known as the central banks. Of course, this begs the question, "Should the rates go down since the 'Global Central Planning Cartel' has failed for 5 years and running to put this monster to bed with liquidity injections?" Alas, I'm already ahead of myself. Let's peruse said CNBC/Reuters article, shall we?

Spanish and Italian bond yields fell on Friday as sentiment toward riskier asset improved thanks to plans for coordinated central bank liquidity injections to help stabilize markets if Sunday's Greek elections cause turmoil.

The prospect of easy access to central bank cash helped settle nerves ahead of Sunday's Greek vote which could put Athens on a path to exit the euro zone if parties opposed to the conditions of Greece's international bailout come to power.

"It's having a good impact... on the bond side we see Spanish yields turning lower. It tells us that central banks at least won't let markets collapse on Monday," said Emile Cardon, market economist at Rabobank in Utrecht.

After reaching a euro-era high above 7 percent on Thursday, Spain's 10-year bond yield eased 12 basis points from its closing level to 6.84 percent, while Italian yields fell 10 bps to 6.06 percent.

What???!!! Isn't this still quite close to a record? Sovereign bonds spike to record yields, after being forced upon private banks, causing insolvency, then said banks request bailouts from said sovereigns who do bail them out, thus bankrupting the country and forcing said bailed out banks to lend the bankrupt countries money again. Wash, Rinse, Repeat! Remember iDead Bank Deja Vu? How The Sovereigns Killed Their Own Banks & Why Nobody Realizes They're Dead… I have explained this nonsensical methodology in detail. I also showed how well it worked out for:

  1. Greece How Greece Killed Its Own Banks!
  2. the ECB .
  3. Italy Bank Run! Italiano Style?
  4. and now for Spain, as I will demonstrate a little further on in this post.
Back to the MSM...

Bund futures were flat at 141.83, recovering after a fall in after-hours trading on Thursday when Reuters reported that major central banks were ready to pump in liquidity, if needed, to prevent a credit squeeze.

Of course, as more and more investors ever so slowly start to realize that The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You.

Some of the relief in Italian and Spanish debt was due to speculative traders buying back bonds to close out short positions that profit when prices fall, traders said.

"People had probably gone quite short (on Italy) after the moves this week on Spain, so I'd expect, with the weekend coming up, people don't want to be short risk and are squaring up," the trader said.

In the medium term, Spanish debt was expected to stay under pressure despite the liquidity contingency plans, analysts said.

The agreement of a 100 billion euro ($125 billion) rescue for Spain's banks has sparked concerns about whether existing bondholders would be pushed further down the queue for repayment, denting appetite for new debt and driving borrowing costs toward unsustainable levels.

"Spain is still in deep trouble, let's not forget that. It has fundamental problems so liquidity to help hold things together doesn't really solve that," a second trader said.

On Thursday, 10-year Spanish bond yields hit 7 percent for the first time since the launch of the euro. The breach of this level raised expectations that the country would be cut off from funding markets and forced to seek a bailout for public finances on top of the agreed banking rescue.

So, as clearly articulated in Dead Bank Deja Vu? the sovereign debt shell game cum financing Ponzi of creating artificial demand through private banks simply assist in destroying both banks and sovereigns when initially you just had to worry about the banks. But in the case of Spain, there's a lot more to worry about - A lot more. Our current subsccriber update (click here to subscribe): Spanish Target Bank Update 6-2012 outlines the problems of a Spanish bank we have covered that is poised to suffer from a gargantuan issue that it simply cannot wiggle away from any longer. As a matter of fact, this issue, when coupled with its state imposed sovereign debt problem means "here comes the next big bailout!". As excerpted from the subscriber report....

KEY OBSERVATIONS

Asset / loan Portfolio deterioration off weakened macroeconomic environment

The Subject Bank, like other major Spanish banks, is being forced to buy sovereign debts as the country finds fewer international buyers for its bonds. The Bank therefore continues to struggle from an asset quality perspective, weighed down by its sovereign & toxic property loans and assets. This has been a major cause for the deterioration of Subject Bank's portfolio over the past couple of years.

The Bank derives ~70% and over 20% of its total gross revenues from net interest income and fees & commission, respectively. The quality of its asset portfolio is therefore extremely important in determining the health of the Bank.

The Bank’s value of financial assets in Spain as of Dec 31, 2011 is over quarter trillion EURO, comprising nearly 50% of the total financial assets in its balance sheet or more than 600% of its total equity (think the negative effects of leverage and gearing as you witness asset value depreciation). In addition, of the bank’s total loans and receivables, over 50% are in Spain. 

With that being said, a picture (or a chart) can be worth a thousand words (or even more Euros considering the rate of depreciation that I see ahead)! When viewing the chart below, keep in mind that the asset values used to calculate this chart are most assuredly overstated, and even then the numbers really look pretty bad. Simply imagine what happens when truth (margin/collateral call, haircut, resumptions, etc.) start calling...

Spains_Ugly_Real_Estate_Crash_Will_Wreck_Banks_and_Force_One_of_Europes_Biggest_Banking_BailoutsSpain's Ugly Real Estate Crash Will Wreck Banks and Force One of Europe's Biggest Banking Bailouts. Remember a run on one big bank causes counterparties to panic. Counterparty induced bank runs do the most damage.

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