Newedge: Spanish People May Regret This Bailout

Tyler Durden's picture

And another bank does a book report on our Saturday post explaining the Spanish bank bail out. At this point, it should be all too clear how Spain's only solution to being in a very deep hole is to keep on digging.

From Newedge's Nicholas Hasting

  • Cost of Spanish funding may yet rise even more
  • Subordination of bond holders under ESM rules is an issue
  • Reaction in Ireland and Greece not helpful to yields

Spanish banks may be off the hook for now, but the Spanish people aren't.

The level of sovereign debt has just been increased but the ability of Spain to fund it hasn't.

Just look at the market's reaction to the weekend's events in which Spain got the European Union to promise to provide EUR100 billion of loans to refund its financial sector.

On the surface, the package all looks like manna from heaven.

Spanish banks get the money they need to cover their gargantuan mortgage losses and stay afloat and the Spanish government, by not seeking a sovereign bailout, escapes the imposition of more austerity measures that the other bailout candidates, Ireland, Portugal and Greece, were forced to undertake.

Prime Minister Mariano Rajoy is certainly trumpeting the package as a major victory for Spain.

So why has the cost of funding 10-year money fallen by only 13 basis points, leaving yields still at a crippling 6.07%?

And why has the euro itself only gained about one and a half cents on the news?

Because now, sovereign Spain may be more exposed than it was before.

Part of the problem is the package itself.

The other part is how the rest of the euro zone reacts to it.

Although Spain may have preferred for the money to paid direct to the banks, Brussels, or maybe one should say Berlin, insisted that the funds be provided to the government for distribution through its Fund for Orderly Bank Restructuring.

This means that it is the state, not the banks, that is responsible for the debt and that the country's debt-to-GDP burden could be pushed as much as 10% higher if all the funds are used. Instead of peaking at 82% of GDP in 2013, the ratio may now continue rising as far as 95% of GDP in 2015.

With the economy still expected to shrink by as much as 2% this year and tax receipts likely to decline in a similar vein, Spain is only likely to get relief unless its funding costs decline significantly.

And this may not happen.

At the moment, it remains unclear whether the loan will come from the European Stability Mechanism, which comes into effect next month, or from the existing European Financial Stability Facility.

If it is the former, creditors of the new loan will take priority if there is any default and existing holders of Spanish bonds would find themselves at the back of the queue.

This is hardly likely to encourage investors to continue buying Spanish bonds and the country could yet find that its funding costs remain high or even climb higher.

High yields could also continue to be a problem for Spain because of the response from other peripheral debtors to what is being seen as preferential terms being given to Spanish banks.

Ireland has already expressed its displeasure and is demanding that Brussels provide Irish banks with a similar deal retroactively.

However, it could be the impact on Greece that is most damaging to Spain. The country's left-wing Syriza Party, which is campaigning ahead of elections on Sunday on a ticket of rejecting the terms of bailout, sees the Spanish deal as justification as to why Greece should refuse to accept further austerity.

This could increase the chances of a left-wing victory on Sunday and raise the risk that Athens will eventually be forced to leave the euro.

The general withdrawal of investors would not only leave the single currency floundering but it would mean even higher funding costs for peripherals and the Spanish people would find that the added burden of bailing out Spanish banks has fallen on their shoulders.

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StrictlyNumbers's picture

WOW shocking you mean piling more debt on top of existing debt is NOT solving their problems... SHOCKING I TELL YOU SHOCKING !!!

slaughterer's picture

Looks like CDS contracts will trigger if the as-of-now unratified and unfunded EMS is used to provide the Spanish "bridge loan."  Reality coming back hard and fast.  

Colombian Gringo's picture

Of course the spanish will regret this bailout. Once again the banksters win.

krispkritter's picture

There are your 'shovel ready jobs'. Having given all the banksters shovels and shouted Dig! Dig! Dig! the hole is deepening rapidly. What a travesty, played out on the (soon to be) bodies of the populace. Make the banksters dig their own graves and let's cover  them over with fiat...

Paper Money Collapse

cowdiddly's picture

Yep thats what a Keyensian will never get. the first rule of getting out of a hole. STOP DIGGING.

Popo's picture

No fight from the Spanish whatsoever.  At least a few of the Athenians took it to the streets.  The Spaniards on the other hand are rolling over for their conquerors, much like the Irish.

World domination has never been this easy. 

Bye Spain.  Now in to the sweat-shops with the lot of you.  Welcome to the new European labor-class.

BlankfeinDiamond's picture

This move by the ECB will only push the Greek elections to the margins. They see Spain getting a bailout without the pesky austerity and now they want the same.  Sunday should be intersting.

slaughterer's picture

The MSM is already using scare-tactics against Greek voters, saying they will lose electricity, lose pension checks, suffer 50% inflation if the vote goes anti-bailout. 

Josephine29's picture

The problem that Spain now faces was explained and demonstrated well here.

Spain’s own debt problem is made worse
The extra borrowing will lead to more of a focus on the level of Spanish state borrowing as well as increasing the absolute levels as I have described above. Not only will the total number (including her regional governments and unpaid bills) head towards 100% of her economic output but more focus will go on the regional governments.
I have written quite a few articles now on the obvious contraction that is taking place in spain’s economy and have labelled it a depression. If we add an economy that is shrinking to higher debt levels we see the scale of the problem which Spain now faces.

So whilst the banks get cash the real economy and the nation gets worse! Where have we heard that before?

Jahbulon's picture

Now that Germany has started down this road they are "In for a Penny, In for a Pound".  They cannot half way bail out anyone, so they are now on the hook for billions more.......

LULZBank's picture

Germany is an export driven economy. They will just raise their exports and keep funding! Duh!

slewie the pi-rat's picture

thePeople have different interests from the goobermint?

is this an "old-time" idea?

it doesn't seem very post-modern to slewie...

slaughterer's picture

Morning chart of the day:

Calling ECB SMP desk, calling Mario Draghi.


LULZBank's picture

PARTY On!! Free Moneez!!

EFNuttin's picture

At this rate, there will be multiple bailouts with more subordination each time.  It reminds me of those stories from World War I where a wave of troops would be mowed down by machine gun fire (the last bailout's bond buyers) only to have another wave surge right over them to be mowed down in turn (the current bailout's bond buyers). 

<sarcasm>The smart money is waiting to be in the NEXT wave, the one in which Spain gets it right, confidence rises, yields decrease, the ratings agencies mark Spain up to AAA+++, and the holders of that final, final, final bailout's paper dance around like pixies as the value of their holdings climbs into the stratosphere./sarcasm>

In other news, Francisco Franco is still dead.

Poor Grogman's picture

Print me long time


timbo_em's picture

Quite funny to observe that while in Spain it's only a bailout for the Spanish banks, French politicians try to sell the same deal as a bailout for the Kingdom of Spain and not so much as a bailout for the banks.

Sean7k's picture

The people must be so very desperate for this to continue to work. The level of fear imposed on all countries and their people is beyond the pale. Why would people choose to accept this? 

Wishful thinking is one thing, stockholm syndrome is one thing, but this is just imbecilic. 

Europe has no "extra" money, no extra credit or funds available. Is any economic system so precious, that people will submit to total financial tyranny for themselves and their children and grandchildren? 

Global stupidity, in the face of global tyranny from a banking community defended by political parasites and the iron fist of a military that promises to kill their brothers and sisters, mothers and fathers; all to defend a staus quo that is unsustainable. Worse, a system that employs eugenics and thought control.

All that people have to do is walk away and re-establish their communities as islands of sanity. We can make our own "money". We can live by our own social mores. We can establish our own systems to encourage stable towns.

There are trade-offs, but the future is not denied us, nor is the technology. The Elites only have a monopoly if you accept it. The ability to create and produce sans government and banking exists in ALL humans.

What price liberty? Responsibility. 

sudzee's picture

The road to complete subordination of private wealth. Where does one look to preserve wealth from this confiscation. Soverign debt is no longer a hiding place. Guns and gold really do look better each and every day.

Vince Clortho's picture

So, any CB in any country is Too Big To Fail.

All Global Risk is nullified for the Bankster Mafia parasites.

Unlimited funding for the Global Elite and debt slavery for the masses.

Hope everyone is content with this setup.


asteroids's picture

Unemployment at 50% for some and NOW you through on another $100B on their backs. Hahahahaha!

sockratte's picture

we're again in 2010 with a much worse environment...

Grand Supercycle's picture

Rally Warning from last week:

'Daily chart now gives bullish warning and significant
SPX rally & USDX retracement should commence in a week or so'

Eric L. Prentis's picture

Malinvestment, malinvestment and more malinvestment—the economic consequences of additional bank bailout insanity, throwing good money after bad, is devastating, long-term.


The 1% banksters continue to win, screwing the 99%. One-hundred thousand psychopathic banksters should be in prison for five years and barred from the financial industry for another ten years. This is the only way to get the fraudsters out of the political process, so we can implement real economic change.