Last year I wrote a piece in which I noted that the EU would implode before the end of 2012. The reason for this was clear as day: EU banks needed to roll over hundreds of billions of Euros’ worth of debt (possibly trillions) at a time when interest rates would be rising as sovereign bonds fell in value:
At that time I wrote:
This is not a question of “if,” it is a question of “when.” And it will very likely happen within the next 10-12 months if not sooner depending on how soon Greece defaults.
The reason that this is guaranteed to happen before the end of 2012 is that a HUGE percentage of European bank debt needs to be rolled over by the end of 2012.
Between now (autumn 2011) and then (end of 2012)…
- French banks need to roll over 30% of their TOTAL debt.
- Spanish banks and Italian banks need to rollover more than 33% of their TOTAL debt.
- German banks need to roll over nearly 40% of their TOTAL debt.
- Irish banks need to roll over almost HALF (50%) of their TOTAL debt.
Let’s fast forward to today to focus on Spain’s current predicament:
Consider the following…
- Spain’s banking system is roughly €3 trillion in size (3X Spain’s GDP).
- Spanish banks’ gross borrowing from the ECB was €316 billion in April.
- Spanish banks need to roll over 20% of their bonds (roughly) €600 billion this year.
Anyone can see by this a simple “back of the envelope analysis “that Spain will need a lot more than €100 billion to recapitalize its banks.
How on earth Spanish banks can roll over €600 billion in bonds at a time when the global bond market has just learned that all private bondholders will be subordinate to the ESM is beyond me (read: it won’t happen).
And thanks to a €100 billion bailout which has put Spain’s REAL Debt to GDP at 146%, Spain is now facing both a banking crisis AND a sovereign crisis simultaneously. There is no entity on this planet that can shore up both the Spanish banking system as well as the Spanish Sovereign bond market.
To be blunt, I fully believe that this €100 billion bailout for Spain’s banks has put Spain in a “checkmate” position. With total unemployment at 25%, a housing bubble that continues to collapse, and an official Debt to GDP ratio of 146%, there is no way Spain will be able to grow its way out of this mess.
Put another way, Spain is a financial tsunami and the €100 billion is an emergency levy made of questionable materials built unqualified engineers: the move has bought some time, but the relief will be brief.
This is why Spain’s Credit Default Swaps (essentially bets that Spain will default) have nearly doubled in 2012 alone. And the bailout has done nothing to assuage investors’ beliefs that Spain is in BIG TROUBLE. Indeed, we’re heading back towards all time highs already within one week of the bailout.
Put another way, Spain is toast. I’ve already assessed that none of the key players (the IMF, the ECB, the EFSF, or the ESM) has the firepower to prop up Spain whose real capital needs are more in the ballpark of €300 billion -€500 billion.
Thus, it’s GAME OVER for the EU. Sure it may take a while for this to manifest as politicians offer various hair-brained schemes to attempt to put off the inevitable debt collapse, but that debt collapse is coming and it will hit before the end of 2012.
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