The Extortion Racket Shifts to Spain

Wolf Richter's picture

Wolf Richter

After 21 summits to save the euro, followed by dog-and-pony shows to calm the markets, followed by confidence-inspiring pronouncements about insurmountable firewalls and pandemic structural reforms, the euro is in greater danger than ever before. After the last summit at the end of June, Spanish Prime Minister Mariano Rajoy walked away with a victory smile, and Italian Prime Minister Mario Monti was so triumphant that it aggravated other heads of state. Now, Spain is on the brink. Its collapse would be so spectacular that people have stopped watching Italy for now.

Despite repeated assurances that Spain would not need a bailout, though it already accepted €100 billion to bail out its banks, rumors floated to the surface Monday that it would seek a bailout. The price: €300 billion. This would be the topic in Berlin on Tuesday where Spanish Economic Minister Luis de Guindos would meet German Finance Minister Wolfgang Schäuble, the lynchpin in any of this. True to Eurozone bailout form, de Guindos denied the rumors and emphasized again that Spain would not need a bailout.

Spain is desperate. Yields on 10-year bonds hit 7.5%, approaching the point where the high cost of borrowing would lock Spain out of the credit markets. But in October, €28 billion in government debt will come due. Hence de Guindos’ mission in Berlin.

But Tuesday morning, new rumors seeped out: de Guindos would push and shove Schäuble to allow the European Central Bank to buy Spanish debt in the secondary markets to force down yields and preserve Spain’s access to the markets. The government, with support from its triumvirate partners France and Italy, has been castigating the ECB that it wasn’t doing its job, which was to print money and buy sovereign bonds, something it had done before, but had inexplicably stopped in mid-March, and it fingered the behind-the-scenes culprit: Germany.

If de Guindos couldn’t persuade Schäuble to give in, “sources” of el Economista said, he would seek a temporary line of credit, not a bailout, to deal with Spain’s “temporary problems,” namely its maturing debt, funding its deficit, and bailing out its regions—Valencia, Murcia, and Catalonia already asked the central government for help. The line of credit would buy time—the mantra in all Eurozone bailouts. And if he couldn’t hoodwink Schäuble into agreeing to a line of credit, “sources” suggested that more “forceful measures” must be studied....

Default. Because Spain has no money to meet its upcoming obligations in October. Then there would be haircuts, the “sources” said. Dreadful words. It worked for Greece; it’s going to work for Spain. Given the amount of Spanish debt and related derivatives decomposing in closets of German banks, those words were a loaded gun to Schäuble’s head.

The extortion racket, perfected by successive Greek governments, has switched to Spain. But this alternative is so extreme, the sources said (thus putting the gun back into the holster for now), that it isn’t the most likely option. Nevertheless, Spanish Credit Default Swaps jumped 31 basis points to a record of 636.

Suddenly, plot twist. Meeting over, a new rumor bubbled up: the Germans wanted Spain to formally request a ... €300 billion bailout! It might fund Spain for a year and a half or so—to buy time. €100 billion would come from the current bailout fund, the EFSF—which would leave it with only €38 billion, after its commitments to Spain, Greece, Portugal, and Ireland, and possible commitments to Cyprus. €200 billion would come from the permanent but still non-existing bailout fund, the ESM; it’s still awaiting the rubber stamping by the German Constitutional Court. Apparently, de Guindos and Schäuble agreed that both funds could buy Spanish debt. Schäuble, however, didn’t yield on one item, despite the big gun to his head: the ECB would not buy Spanish bonds.

The conditions linked to the bailout package haven’t been determined yet. However “sources“ close to the government believed that no additional harsh conditions would be imposed due to the structural reforms announced two weeks ago and those already implemented—measures that have caused demonstrations and some violence across the country. And an utterly peaceful and tongue-in-cheek protest by naked Firefighters [I’m not kidding; check out the video.... Naked Firefighters Protest Salary Cuts].

Given how bailouts have gone so far, the combined €400 billion won’t be enough, and it will probably be clear that it won’t be enough before the ink on the deal is even dry. Just like Greece now needs a third bailout, which it is unlikely to get, Spain’s final bailout costs will be far larger than the €400 billion, and far larger than any of the prior bailouts. And then there’s Italy. Read.... But Who The Heck Is Going To Do All The Bailing Out?

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disabledvet's picture

The "extortion" is OF Spain not because of it. "On the one hand we say here economists and economics are all a fraud. On the other hand it's perfectly normal for Germany to have negative interest rates and Spain to be going bankrupt." Sorry folks...but this is rank speculation in the name of profit "pitting one country against another." Germany hasn't figured out yet how to keep the value of their euro high while "ejecting the bad members" from the club thus "keeping their banks and insurance companies from imploding." obviously "taking down the other guy's" is counter-productive. Screwing with the IMF doesn't help either. The bankruptcy of say...Switzerland...might work however.

foytik's picture

Whats the crisis? $30 billion in Spanish bonds coming due in October? That is small. Why do they need $300 billion in bailouts?

Spain's problem is the 7.5% interest it has to pay on bonds. Thats like a market rate, reflecting the risk of default. But there is a perverse feedback loop, higher rates make default more likely, which leads to still higher rates. Good thing the US does not have to pay market rates for its bonds!

If the ECB would offer Eurpean nations bonds near US rates, (<1%) then they could all kick the can down the road for a while. But it seems like TPTB want to keep the crisis in Europe simmering.

falak pema's picture

Merkel your call. Draghi wants to buy sovereign bonds to infinity to save the bankster cabal world wide.

The big guns of Oligarchy don't want Spain/Italy to burn. All the while they make money on both sides of the table!

Crazy logic of a serial obesity freak who wants his cake and eats it as well. 

Humpty Dumpty time as both Euro and USD are unsustainable. Is QE-3 round the corner?

Can they continue this charade for eternity? What is eternity in a finite world with a decaying paradigm?

Five years...according to the most optimistic; five months according to the Mayans.

I'm heading for Bugarach! bugarach - Recherche Google

Wolf knows full well that the GErmans love to cream the PIIGS, he was on the Keiser show! 

Extortion is a two way game; IMF Troika vs sovereigns in tug of war around a fake money system that burns first world.

PS : A more analytical perspective of this shilly shallying game being played by Germany, in their foot shuffling on PIIGS sovereign and global banking crises, is given here :

Josh Rosner: Eurozone Crisis – No More Safe Havens « naked capitalism

silverdragon's picture

Walk away from the debt, f*ck the banksters.


Peter Pan's picture

I would prefer to see it done the other way round.

ReactionToClosedMinds's picture

another great Wolf R posting .. thank you ZH for this

no, I am not related or connected to WolfR .. I just appreciate hard edged 'granular' reporting like Michael Yon does

ReactionToClosedMinds's picture

by the way ... if this is 'true' ... it is 'real' news ... why gold is up overnight while other futures are undecided .... only at ZH ... not on phone company tv

Lloydie's picture

Nice plan, but when Greece exits the Eurozone, the EFSF will be saddled with about 70 billion euros worth of losses, which have in turn been guaranteed by Eurozone governments. So, where are they going to get the money to do that and fund the ESM?  Especially, Spain and Italy. 

JOYFUL's picture

NOthing like a good rant against the Club Med krew to cleanse the sinuses and lighten the lederhosen. Easy to see why a guy would want to take a kick at a dog, or a PIIG, as the case may be.

Harder though, to assemble the requested sympathy for Herr Schäuble -as if the starter pistol that the lesser luminaries of the Euro Xone might be able to sneak into their audiences with the Teutonic Knights can somehow compare with the Damocles' sword directly dangled over his head by the Sio-Nazi hierarchy that really runs the show, outside of Wolfs' fabulous fables...

Mr Schäuble is really just a stableboy for the moneypower who are directing the show...he, and the other puppets assembled upon this stage, are no longer even worth writing about...unless yu are an aficianado of puppetry.

i-dog's picture

Hey, Joyful: While you give Wolfie a hard time, I'm giving him 5-stars each time ... not because of his support of Germany (after all, he is a German!), but because anyone who shines a light on the central power's poisonous puppetry and fiscal finangling gets my vote!

IMO, the early demise of the EZ House of Kards is the only hope for the beleaguered (though spendthrift) Western world. Then, we need to break up the ZATO military machine. Then we need to clean up all indebted balance sheets.

Though all free-spending Western democracies need to drastically trim back military spending, bank life-support and wasteful consumption, the current headlong rush toward the zionist "synthesis" of an NWO needs to be stopped in its tracks first!

JOYFUL's picture

Well, I'm delighted to see we're on opposite sides of an issue; there's nothing like a bit of Hegelian-type dialectical dynamism to add spice to the punch bowl!

I'm a big fan of Heckle n Jeckle: I tend to regard Wolfie a lot like Chesty, the bulldog that the magpies loved to torment...the way he's constantly beating up on the swarthier section of the tenement house there in Euroville, he deserves a few lumps now an agin!...

but perhaps yur affection for the ol lump is not entirely misplaced...the show just wouldn't be the same without im!

TheFourthStooge-ing's picture


NOthing like a good rant against the Club Med krew to cleanse the sinuses and lighten the lederhosen. Easy to see why a guy would want to take a kick at a dog, or a PIIG, as the case may be.

The surreality of the whole European situation suggests that any dog being kicked is an Andalusian Dog (no doubt prompting AnAnonymous to break out his wok).

Mr Schäuble is really just a stableboy for the moneypower who are directing the show...he, and the other puppets assembled upon this stage, are no longer even worth writing about...unless yu are an aficianado of puppetry.

Thunderbirds are go.

Ghordius's picture


This "surreality" is in fact just the dilemma out of several different options:


- is it ok to have sovereign defaults? the members of the EZ that would have to default are against it

- is it ok to print, so that nobody defaults? there the Club Med is trying to pressure Germany, Finland et al

Meanwhile all the involved banks on both sides of the Channel want their pound of flesh out of the "turmoil". And the City of London asks for either a full fiscal union OR a break-up of the eurozone (mainly because both options would do wonders to their books).

One of the other options would be to wait until Bernanke finally prints (much) more, then ECB printing can resume without getting too much pressure on the US economy.

JOYFUL's picture

nice catch on the birdmen Stoogley! Hadn't realized they had the token black in the cast...must of been one of the very earliest precursors of PC! But then all those shows were great precursors of the present...which resembles nothing so much as a gigantic cartoon set.

My personal favorite in the 'strings' section however, was Supercar...MitchtheMonkey definitely moved the beat of a different drummer! ...

just repicture Mitch as O'Barry, and King Cool as the Nuttyahoo and yu've got a time capsule snapshot of the present moment of geopolitical madness in the M\E! [maybe even steal a title from Buñuel ...Blood Wedding!>!>?!?]

JOYFUL's picture

but he was also left.

In fact, they say he swung both ways....kind of appropriate for the sock puppet kreation of the sionist moneypower...

anyways, we've got the OBummer to cover all that territory nowadays - why not get out of yur time capsule and live a little>...if yu loved Adolf, yu'll go gaga over Barry!

boogerbently's picture

They need to let Greece twist to show they're serious about austerity.

Peter Pan's picture

That's true but perhaps Greece should default and let the others twist as well. This nightmare was as much a result of stupid lending as it was a result of idiotic borrowing.

q99x2's picture

I watched a UN video today about Barcelona. It was a promo on how cities should be developed according to sustainability. The UN spokespersons in the video clearly thought city-states and not nations were the way of the future with the UN and NATO as the world's central Government.

In that video it was pretty easy for me to see that the UN has a desire for world domination by eliminating sovereign nations. But it was a scam because the renovating of the city of Barcelona was possible because of banking fraud.

Hope this economic implosion underway takes the UN with it.

mharry's picture

Sustainable communities is just another globalist scam. Everything U.N. has to be stopped, they need to die.

tbd108's picture

When the dollar dies its inevitable death, the UN will go with it and may it rest in hell.

Rogue Trooper's picture

Long Guillotines and hungry Pigs... BitChez.  Best way to treat those UN,, scum when the curtain is finally drawn :/