Deutsche Bank: "The Spanish Recapitalization Is Not Working" - A Market Shock Is Required

Tyler Durden's picture

This weekend, everyone's attention will be on the Greek elections, however it is Spain that has now become the "fulcrum security" of Europe. As such, events in Greece are merely a catalyst that will set off a chain of events that will have an impact not only on Spain, but on all of Europe, and thus, the world.

As we pointed out last week after the Spanish bailout announcement, based on a preliminary analysis which had been compiled by Deutsche Bank's europhiles hours before the formal announcement, and one which just happened to be a carbon-copy of what was proposed as the 'final (and failed) Spanish solution', it appears that the events in Europe are if not orchestrated by the largest German bank, then certainly receiving part-time advice.

Which is why we were somewhat disturbed to read Gilles Moec's summary this morning, which points out the patently obvious: "Spain recapitalization: it’s not working." Whether it is that Europe's brightest minds forgot about the threat of subordination (promptly reminded by Zero Hedge hours after the formal announcement), and that the scars of the Greek cramdown are still fresh in the private sector's mind, it does not matter: as DB says: "Unfortunately, the market reaction was clearly negative, with Spanish 10 year rate brushing past 7% for the first time since 1996. Two main elements probably explain the market reaction: first, the increase in public debt triggered by the recapitalization whose cost will stay on the sovereign’s balance sheet under the current rules); second the seniority attached to ESM loans, if this scheme is used as the final channel for the EU loan instead of the EFSF."

Yes, it is "unfortunate" that Spain's bailout plan was poorly planned, organized and executed. It is not unfortunate that some are still left who can do simple math and call out Europe's failed plans. Which brings us to the present, where we find that even Deutsche Bank has given up hope for interim solutions, having realized that the market will no longer accept transitory, feeble arrangements. Instead DB is now formally calling for a big bang resolution, one coming from the ECB. Here is the punchline: "ECB has room for manoeuvre, but needs political cover for a ‘big’ policy" or said otherwise, "A shock is required to get a liquidity response." In other words: Europe's only real hope for even a stop gap solution... is a wholesale market crash, not surprisingly the very same conclusion that Citi reached on May 19 when they warned that only Crossover (XO) at 1000 bps or wider could push Europe into acting...

Basically stated, anything less than a controlled market crash, one that finally gets the ECB involved with Germany's permission of course, merely pushes the market higher on nothing but hope of an intervention that said market lift makes even more improbable, as now both Citi and DB admit, which can and will lead to an uncontrolled market collapse, one from which not even the ECB will be able to extricate Europe.

In this light, will Greece simply be the start of the much overdue "controlled demolition", that will bring the ECB out of hibernation, that is paradoxically instrumental in avoiding an uncontrolled demolition, where not even the ECB will have any powers left to prevent a collapse?

Here is how Deutsche Bank sets the strawman - on the recapitalization, the market is wrong, and our advice was, well, right:

The statement by the German finance minister on Monday that he found find an ESM solution “more efficient” may have rekindled among investors the fear that the “Greek blueprint” would be replicated for Spain, with the private sector left to bear the brunt of any restructuring.


We think that the risk to Spain’s public debt sustainability, even after a EUR100bn recapitalization effort, would remain manageable under what we consider realistic assumptions on growth and interest rates (see FE Europe 8 June). Spanish public debt would remain significantly lower than in Italy and not so far above that of France, for instance.

There is always a but. And in this case, it is yet another event out of left field that will likely send spreads soaring even more than before:

However, even if we think that the long-term issues surrounding Spanish public debt are overstated, meeting the government’s refinancing needs in the next few months is getting increasingly difficult, in our view, since the ‘war chest’ accumulated by Spanish  banks in the LTROs of December and February is drying up. At peak, in March 2012, Spanish banks had accumulated EUR 88.7bn on the ECB’s deposit facility. This has fallen to EUR 36.8bn in May. Spanish banks have committed to lend EUR 35bn to the regions this year to help them pay down their arrears. They need to refinance c.EUR 80bn of their own debt before the end of the year. Taking the slack from nonresidents reducing their exposure to the Spanish sovereign is going to stretch their resources further. By March 2012 (latest available data), non residents had reduced their holding of Spanish public debt to EUR 158.7bn (31.6% of the total), down EUR 6.4bn in a month and down EUR 26.1bn in a year. The valve of adjustment under the current circumstances would be to cut lending to the private sector further, thus sending domestic demand into more contraction.

In other words, "the money, it's a gone." Needless to say, the bank that will do everything to avoid the market's attention being focused on its capitalization and leverage ratio, already has a follow up plan, after its first one failed:

To unlock the Spanish situation, we think that three ingredients should be envisaged:

  1. Another round of long term liquidity injection by the ECB. Even if the political conditions are not met at this stage (see last section of this article), we believe that this would be the only possibility for local banks to continue to support their sovereign. Further tweaks in the collateral rules would probably be needed to ensure that banks could take full advantage of this additional round. In our view, to try to incentivize banks to re-start lending to the private sector, the rules could be changed to allow only recently originated loans to corporations, for instance.
  2. Announcing recourse to the EFSF rather than the ESM to recapitalize Spanish banks. This could be seen by the market as a sign that seniority is not a major preoccupation of the Europeans when dealing with Spanish bank recapitalization. This would entail a negotiation with Finland on a collateralization of its support which, given the size of the Finnish contribution, is manageable, in our view.
  3. Ideally, the most powerful signal would be to open the possibility for direct recapitalization of banks by the euro rescue mechanism. This could not be done via the EFSF, but is still doable for the ESM, either via a unanimous change in the list of instruments by the board (article 19 procedure), or via a revision in the treaty – which still has not been ratified by Germany - if the legal basis for an “internal modification” is too weak.

Fair enough, "Door 1" it is, as further confirmed by yesterday's statements out of Draghi, and various media leaks, that a European ZIRP may be just around the corner. There is, however, a problem with getting another LTRO out of the ECB. As Moec says, "ECB has room for manoeuvre, but needs political cover for a ‘big’ policy."

Again, from DB:

With the market unconvinced by the Spanish bank recap package and near-term prospects of an ERF unconvincing, the market will be looking to the ECB as a last resort to restore some order.


There were mixed messages from ECB President Draghi’s comments on Friday, 15 June. In his address to the annual ECB Watchers conference, he claimed the objectives of the 3Y LTRO have been “broadly met”, in particular the easing of supply constraints on private credit, but pledged to provide liquid “where needed”. He claimed economic stabilization remains the ECB’s baseline, while at the same time pointing to the weak data since the baseline was agreed and “serious downside risks” to growth. He claimed that the ECB cannot “fill holes” in the EU’s process of mending heterogeneity, but that the ECB “partly responded” to heterogeneity with the enlarged collateral pool, specifically the credit claims collateral.

And here we get to the crux of the issue, the one that has inverted the expectations outcome out of Greece, whereby if Syriza wins, the market's Pavlovian dogs are now fully expecting a global central bank intervention, aka the Bank. Should Syriza disappoint and Greece end up ungoverned, or paradoxically get a pro-Europe government, the lack of response will likely result in a risk off mood come Monday especially since the entire upward move in the past week was purely short covering on fears of monetary policy response:

A shock is required to get a liquidity response


Draghi discussed the concept of “adequate liquidity” on Friday. He differentiated between normal times, when the volume of liquidity is determined by banks’ obligatory reserve requirements and other autonomous factors, and times of financial instability, when the central bank must counteract bank funding market tensions and “systemic consequences”. Financial stability is an ECB responsibility. Compared to the comments from Draghi at the 6 June press conference, when the hurdles to more liquidity seemed high, there is more of a sense of ‘readiness to act’. That this message came right at the start of Draghi’s address to the ECB Watchers conference implies the importance of the ‘readiness’ message. The full allotment regime remains in place. Banks can get as much liquidity as they require for one week and for three months. The 3Y LTRO Draghi describes as having “broadly met” its objectives, specifically, easing credit constraints. He admitted it would take longer to judge full success (a flow of credit to the private sector), but demand may be weak. We have highlighted the importance of the next ECB Bank Lending Survey on 25 July of the ECB’s judgment regarding the need for additional vLTROs. It is possible in the context of more disorderly market scenarios that the ECB pre-empts the BLS to reengage the vLTRO policy which has, in Draghi’s view, already ‘broadly’ worked in similar market conditions.

And there you have it: if have more "disorderly market scenarios" read market crash, but not terminal crash, then ECB brings out the firepower.

Anything less, and everyone will be disappointed as it merely enforces the continuation of a now failing, and obvious to all, status quo, one which sees Spanish bond yields leaking ever wider, until Italy too finds itself beyond the dreaded 7% barrier.

Will Greece be the catalyst to bring on this much needed response from the Central Banks? Or will Greece "muddle through" for however many weeks before it needs another bailout, and/or finally throws in the towel, while the global central banks do nothing? 

Find out on Sunday night.

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Aziz's picture

Frankly I think the thing we really need is a collapse of the entire system and some kind of reset, not more central bank printing. More printing will just kick the can, and give society a chance to address underlying problems which most likely they will continue to ignore (falsely believing the money printing "fixed" the problem) resulting in an even bigger collapse down the line.

JustObserving's picture

They will not permit a total collapse of the system.  There may be war instead.

If a collapse is permitted to happen, the whole world may turn upside down and China may become the new dominant economic power.  Europe's living standards may fall by 50%.  War may be preferred to this option.

The Mayans look more prescient everyday.


kindape's picture

you are right they won't 'permit' a crash of whole system and that war would happen first. but there is ample room for unintended consequences and non-linear events from bad human decisions

you are very mistaken if you think everything implodes and somehow China ends up on top - they are critically linked at hip now to US/OECD. They are in very very bad shape resource/environment/credit wise. 


Europe living standards fall about 50%?  Yup. And USAs about same level, if we are lucky.


Mayans=BS. (but I agree the timing is gonna be about right)

flacon's picture

I saw Obama read this book, so I bought it and read it:


The Post American World ~ Fareed Zakaria


A rather lame book written by a die-hard Keynesian - but still it's good to know what lies they are injesting. 

francis_sawyer's picture

I'm too stupid to figure these things out on my own, so, would someone kindly explain to me how "war" will fix the problem & prevent western society from collapsing (as armchair QB-ed above)?...


Please do not hesitate to include steps & details along the process...

Things that go bump's picture

It is a keynesian dream.  Everything gets broken.  Winner gets to fix it.  Loser gets to march to St. Petersberg in winter.  

markmotive's picture

Wow - that lasted a week. The marginal returns on bailouts are shrinking dramatically.

And Spain has waay more to go. Real estate is 79% of total Spanish wealth and housing is expected to drop another 30%.


Divided States of America's picture

War itself would cause a financial system collapse....but like the saying goes, "Never waste a good crisis", from the most 'high' jbag extraordinaire (Rahm Emanuel) once said. Yup, Iran will be the target.

francis_sawyer's picture


Iran is an idiots dream with regards to conquest...

The joos have been barking about 'taking out' Iran for more than 2 decades now (&, of course, by the AIPAC lobby, have managed to sell it as a US problem as well)... That's all it is... Rhetoric & Jawboning from a bunch of pussies...

All the while... Iran, Russia, & China are saying... "Go ahead... make my day"...


A bridge too far... francis_sawyer humbly counsels... DON'T GO THERE... Moreover ~ STFU...

AldousHuxley's picture

Iran is ex-empire...meaning they might be poor but their elites know how colonialism works. They will sell out to Russia or China against US. Russia and China will be happy to let oil rich country into their new empire building ambitions.


Largest holder of Spanish debt are Spaniards themselves followed by France.

AldousHuxley's picture

Argentina is where Spain gets her oil.


But bunch of German ex-Nazis went to Argentina. If Germany can gain control of Argentina, she no longer needs Spain.

ITrustMyGut's picture

this may explain a genuine apathy or interest to ever do anything about any of this, FUku, Fiat, etc...

New Clif High ( 6/16 ) - fairly urgent. mp3. download it and listen.. 38 mins  ( top one )

or directly here....  It speaks to his reading and listening to this work....  far sight institute for their 2012 page which is also discussed here in a interview with Cory Brown on the same topic... go to 22 mins in whats important here.. is Cory Brown's group has published in a scientific journal.. a quality RV ( Remote Viewing ) experiment and Clif's work... independently.. arrives at validation of the same! yikes....


fxrxexexdxoxmx's picture

You know if that darn Koran did not prompt people to kill non-Koran following people them Joos would have no meaning.

francis_sawyer's picture

How many 'winners' of wars have there been since WW2 & how have those 'fixes' worked out?

How many winter marches have occurred?

emersonreturn's picture

francis sawyer, while i agree with you there have been few winners since WW2, tibetans have suffered several winter marches, and i think china's war on tibet has secured for it a pivotal point of defense, 7 asian headwaters, as well as untold minerals. china's war and occupation of tibet has helped china immeasurably.

francis_sawyer's picture

On a global scale, Tibet is a 'skirmish'... I don't want to argue humanitarianism or individual plight... But it's the 'Gadsden Purchase' or the 'Milagro Beanfield War' as conflicts are concerned...

Instead ~ I'm talking to all the people here who are looking at WW3 as the ultimate solution to the banking collapse... While it may happen in the end, it will solve nothing... WW3 isn't going to start in Tibet...

Look ~ I'll go ahead and say it... OUTCOMES are not SOLUTIONS...

- Bolshevism (outcome) was not a 'solution' in the end... Who was behind that anyway?

- National Socialism (outcome) was not a 'solution' either... Who was behind that anyway?

In 1948... Israel achieved the 'outcome' of statehood... Has it been a 'solution'?... In 2008, Barack Obama was elected POTUS... Has that 'outcome' proved to be the 'solution' to cultural division?

Don't answer with your HOPES, answer with the truth...

AldousHuxley's picture

US pratices neo-colonialism. they realize wars are costly, so they try to settle matters through other methods first

  1. soft diplomacy influence peddling, honorary titles, export US culture and media, get foreign leaders trained in US schools.
  2. Money (American companies buying foreign resources and companies)
  3. CIA covert ops (kill democratically elected presidents and install puppet regime
  4. UN, sanctions, trade agreements (NAFTA fucked Mexican farmers)
  5. lastly, WAR.

So far, American companies and large stock holders have benefitted.

Indians speak English, drink coca cola, elect puppets, etc.

Chinese are revolting though.

Russians forever lost cause. Sadistic fucks still have nukes and lots of energy.

francis_sawyer's picture

1. "Soft diplomacy" works as long as some can be bribed by your bullshit... Whem Hilary Fucking Clinton becomes the interface for your "soft diplomacy", you're essentially fucked...

2. Money works as long as people believe in the paper hedgemony ponzi... After that, you're fucked...

3. CIA exists because they're the best drug runners, money launderers on the planet (save for the Vatican)... It has no function if 'society' collapses... Fuck ~ For that matter, it has no use now except for thugs to collect paychecks as long as there is still belief in the 'system'.

4. Fuck the UN... It's never been useful for anything...

5. The US has been about WAR & only WAR since 1913... War is the quickest way to get into debt... The private banking families have known this, & practiced this for over 200 years running... It took awhile, & several attempts, but finally they succeeded in infecting the US political & media fountains at the turn of the 20th century & it has been a downward spiral ever since...


Chinese don't buy into this shit... Russians don't buy into this shit... Iranians don't buy into this shit...

Therefore... HOUSTON ~ We have a problem...

Neither the US, nor it's Jew banking overlords have any power to stand up to that... It's all histrionics from this moment forward...

Joseph Jones's picture

Here, here! 

All drinks on me this Saturday night, in this poster's honor! 

THX 1178's picture

Consider an economic depression-- What is the problem with it? Not enough jobs or too many people? The great depression was solved by killing 60+ million people in the industrialized world-- a large chunk of the population... Presently, unemployment is absolutely astronomical-- above the official number--, and corporate profits are nearing all time highs... so what does this mean??? It means They no longer need us.

AldousHuxley's picture

depression are bad for debtors who need to be able to roll over debt to finance operations.


US government/military is in debt to China. Depression means short on cash flow....Chinese /Russians would be able to buy American assets at firesale prices.


Also to elites, people = slaves = assets with monetary value. Kllling 60+ people means killing 60million slaves..suicide for a plantation. Their economy would collapse, less workers, less demand, lowered assets, their land values drop, their ranking in the world drops. Corporations need us.....not as workers, but as indebted consumers which most Americans are.

dumbass americans buying stupid shit....wait 50 years and their kids will be slaves under control of billionare russians and chinese. better make it into the investoment class real quick, because the bridge is going to get cut.



BigDuke6's picture


i get the feeling you don't watch AMerican Idol much?

Joseph Jones's picture

Man you suckers are funny! 

crawldaddy's picture

what does a loan shark do if you try to default?  he breaks your arm.  Same thing, but on a national scale.  If you dont pay, we mess you up and TAKE payment.

OR, if you owe someone a lot of money and you cant pay, but you can beat them up, You beat them up and suddenly that debt goes away.


The great reset happens in a multitude of ways, but first one party has to be MADE to accept it.

francis_sawyer's picture

In a loan sharking world, if your arm is broken, it hurts, but the lender is still out his money... If he gets tired of breaking your arm and kills you instead, you're dead & he's still out his money...

On a national scale, the 'loan sharks' aren't sovereigns, they're bankers (furthermore, they're not lending real assets, they're lending debt counterfeitted out of thin air)... These bankers can't break your arm or kill you because they're just pussified hook nosed dweebs who think they're doing God's work... So they have to HOPE they can bribe politicians to fund a military to do the job in absentia...

As in small scale 'loan sharking', the FEAR FACTOR lasts for awhile... Then it doesn't anymore...

AldousHuxley's picture

loan sharks are not bankrupted American bankers.

they are chinese state sponsored (meaning backed with military) banks.


China threatened US to leave dollar hegemony by switching to Euro like arab oil money. US said ok ok, but now they got bankers to attack EU's weakest links (greece, spain, etc.)  and break it up so China has no where to go in the future. Yuan as global currency is still 100 years away...they need to take over share of GDP first.


that's why goldman sachs and banksters do not get indicted. Military/Government need banksters to pull the same tricks on foreign investors and foreign debt.






HurricaneSeason's picture

So the military and government are in charge?  I thought goldman sachs tells them when they can have a war or when the banks need $700 billion or else they'll be 20% interest and martial law. Didn't the outgoing president and the incoming president and congress all get that memo at the same time? Paper covers rock and I think military covers congress most of the time unless there's a banker with better bullshit.

francis_sawyer's picture

The 'people' are in charge & will always be in charge as long as they have the balls to execute that prerogative...

Instead ~ we get long periods of pussified zombies who'd rather sell out their their share because someone said that they didn't have to shovel anymore if they would oblige to spy on & rat on dissidents in the chain gang.. 

55 men's picture

I agree with you on the mayan b.s., , i believe the people in control will use it to there benefit. Most of the population thinks the world is going to end that day and if any thing that has some discomfort with the financial industry the people will believe it has to do with the prophecy and continue to stay complacent . Just a thought ....

TorchFire's picture

Wheels keep turning
Something's burning
Don't like it but I guess I'm learning

Shock! - watch the monkey get hurt, monkey

theMAXILOPEZpsycho's picture

I think there is a legitimate conspiracy at play here; with all the focus on the global economic crisis (which could easily be solved if governments would become more centralized, more cooperative, and more ready to inject liquidity) everyone has taken their eye off the real economic disaster caused buy greedy capitalists exploitation: the environment. Nothing, nothing, regarding the worlds financial system will matter if there isn't clean air to breath, and good soil with which to rear crops, or good habitat for polar bears. Amsterdam may well be bellow sea level in a few years.

Therefore I propose robust new measures. Everyone using products that involve the burning of fossil fuels at all levels of the supply chain must pay a proportionate tax. Society MUST recognize the damage being done. Using fossil fuels should be equated to murder - the destruction of one's society. The added benefit of this tax is that the extra revenue could be used to help top lending institutions recapitalize and restart a period of economic growth.

derek_vineyard's picture

collapse?????? the powers that be will do anything and everything to prevent that including ZIRP to infinity, unlimited money supply, shrinking wages/job security fears and record corporate profits.  i'm not making this shit up....they will do it.

holdbuysell's picture

Weimar Germany did everything in its power to prevent a collapse too.

However, when the herd changes direction, (e.g. loses, faith, confidence and/or panics), it can't be stopped.

It only takes a small percentage of the herd to change direction with conviction and the rest will follow; that's the tipping point.

Captain Benny's picture

Bingo - And that is why the MSM is blacking out any deep discussions about what is going on in Europe and instead focusing on the wonderful stock market "rally" hidden in some very volatile equity markets.  Not a peep out of the media about bond yields and how bad they are for Spain, Italy, and Portugal.  Not a word about the "bailout" having Italy borrow at nearly 7% while loaning out at 3% to Spain....  Not a peep about anything that makes a damn other than the equity market rally.

I think we're about to see some drama in Europe escalate but when it settles, the US Treasury market will be so crowded that there will be a rush to the theatre's exits... leaving behind all the MOMOs holding high yielding treasuries at a loss.  Tough shit, but this Euro contagion is coming home to roost pretty soon.

Manthong's picture

:) I was typing as you posted.

Manthong's picture

Wait till the larger audience of the big show discovers that the fire exits are jammed and the pyrotechnics have set the whole theater ablaze,

SaveTheBales's picture

No problem.  Hand me a politician.  I'll have this fire beat out in no time.

crawldaddy's picture

Weimar republic also collapsed mainly due to France marching their army in to collect payment. Germany shut down its economy rather than pay. People seem to forget this fact.

francis_sawyer's picture

 "France marching their army in to collect payment"


HAHAHAHAHAHA!... Mistaken for a surrender...

Bansters-in-my- feces's picture

Hey MaxilopeZ FuckTard....

Speaking of fossil fuels,you ever see how much chemicals (chemtrails) is sprayed on us evey day...????

I think those Jet tankers are burning said "fossil fuels"

Maybe you could convince the Terrorist (goverments) to stop using so much fossil fuel  to fly the Jets that carry the chemtrails,cause there is one hell of alot of jets dumping this shit on me EVERY DAY....


Bansters-in-my- feces's picture

I see the 11 users that gave red arrows to my chemtrail comment never go outside much,don't look up when they do,or live in a big city where you can't see through the smog anyways OR are in complete denial....


Wake up .and Look up...... wayyyyy up............

neidermeyer's picture

Fossil fuels equal murder?? Put down the crack pipe ... todays cars have exhaust so clean that it is often less polluted than the air ingested by the motor ... same for most things that use gaseous fuels... even the "worst" .. soft coal can be cleaned up to the point where no reasonable person could object...

You want no fossil fuels?? You can eat your pork chops raw .. I want mine grilled ...

Ned Zeppelin's picture

Please post the video of youself with an exhaust pipe in your mouth breathing the clean air.

skipjack's picture

Did I really waste 10 seconds reading this tripe ?  Or did you just forget the /sarc tag ?


Cluestick - look up the phrase "you can't solve a solvency problem with liquidity".


Retard.  Cleaner air will do nothing for you if there is no food to eat or water to drink or a place to shelter out of the elements, all of which you will be deprived of if the banksters keep on with more globalization and liquidity "injections".

dearth vader's picture

>> Amsterdam may well be bellow sea level in a few years. <<

Well, that's no news. It has been for an odd 700 years, already.

No need to bellow.

Umh's picture

Did you ever hear about the Dutch boy and the dike?

The Monkey's picture

Central banks are fixing to find out the downside of risk suppression.

We'll soon find out if they have the balls to inject another dose of pain meds, distorting again the signals sent by the market. At this point we have no idea how many broken bones our over-medicated quarterback is playing with, but the clock is ticking.