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Six Reasons Why Spain Will Be Forced To Request A Sovereign Bailout

Tyler Durden's picture




 

Just as the summer finally arrives in Northern Europe, the Eurozone crisis is heating up once again. With an increasingly flat (heading to inversion) yield curve, and spreads at record wides,  Spain appears to be in a downward spiral of market turmoil that might require a full-fledged TROIKA bail out. However, as UBS points out, rather than taking the country off the market, the program would have to allow Spain to keep borrowing from private investors. Any bail out of Spain would have to be designed in a way that would also be applicable to Italy. Spain has been the most recent crisis focus, and looks to intensify further with nothing immediately in sight that could reverse the trend. We, like UBS, have argued for some time that a full-fledged TROIKA program will ultimately be unavoidable and the following six reasons briefly explain why anything else is a pipe-dream.

Via UBS FX Strategy:

The Eurogroup last week formally approved a €100bn bank bailout but as our banking colleagues have argued, the programme generates no equity and no funding and is thus unlikely to make any lasting difference either to the limited market access of the banks or to the credit crunch affecting the country. Also, the decision at the June EU summit to take a first step towards a banking union has done very little to ease the pressure. The market initially assumed that the €100bn would be offloaded from the sovereign balance sheet to the ESM by the October or December EU summits once an ‘effective supervisory mechanism’ had been created.

However, subsequently it became clear that:

1) creating European supervision might take substantially longer than just a few months, not to speak of a proper banking union, and

 

2) a strong argument can and will be made that a banking union can only ever be a forward-looking mechanism, never an instrument to deal with legacy debt. Also note that the impatiently awaited bottom-up bank stress tests will not be available until the second half of September.

 

The question is what the trigger could be for the Spanish government to request a full-fledged troika programme given the political capital invested in being able to avoid calling in the IMF. Last week’s poor bond auction illustrates the increasing difficulties that Spain is facing at refinancing itself. 10-year yields seem to be climbing steadily towards 8%, which if persisting for a few weeks could force the government to give in. The big challenge will then be how to design a troika programme that avoids Spain losing market access. In fact, officials in Brussels and elsewhere have been agonising over the question for months and there certainly is no easy solution.

 

The most obvious option would be for the EFSF/ESM to use its powers to intervene on the sovereign bond market, as reinforced by the June summit. The problems of such an approach are well-known:

 

3) the EFSF would first have to issue debt before having any cash to spend on bond purchases,

 

4) the ESM while designed to have cash from the start will not actually be established before mid-September at the earliest,

 

5) even if the EFSF/ESM were able to effectively backstop the Spanish bond market, it would not be a model applicable to Italy, and

 

6) bonds purchased by the EFSF/ESM would be seen as senior to private sector holdings, given the Greek precedent, hence fueling subordination fears.

A mess indeed - or will Spain (like Greece) be forced to sell assets (Jules-Rimet Trophy? securitize Torres?)...

 

and as Goldman reminds us:

The-end June European Council has also signalled a preference for sovereigns to help other viable sovereigns on ex-ante conditional terms, but not their banks. This appears to us as a large shift relative to the treatment of bank creditors in Ireland, and more recently in Greece. Quoting again from Mr Draghi’s interview: ‘One important point is the involvement of senior creditors of banks: the ECB believes that such involvement should be possible in the case of the liquidation of a bank. Savers must be protected, but creditors should be part of the solution of the crisis. It is a matter of limiting the involvement of taxpayers. They have already paid a great deal.’ Admittedly, Mr Draghi did not say whether this applies to the current situation, or the future ‘steady state’, but we tend to think the former.

 

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Tue, 07/24/2012 - 09:14 | 2645169 mrktwtch2
mrktwtch2's picture

sorry boys you are not going to be able to force a united states of eurpoe through debt..

Tue, 07/24/2012 - 09:22 | 2645190 gatorengineer
gatorengineer's picture

And Why not all Germany would have to do is guarantee it all loose AAA, crash their export market, and pay 5% or so on 10 year paper.  Easy.....  After all its for the greater good <sarc>

Tue, 07/24/2012 - 10:14 | 2645209 engineertheeconomy
engineertheeconomy's picture

Spain will be forced to request a bailout because it's too fucking stupid to have it's own printing press or simply go on a fucking Gold Standard

Since the beginning of history, no amount of interest has ever been paid on an inorganic loan

 Only the principle can be paid back on an inorganic loan

 Nobody has ever figured out how to pay back the imaginary interest. It doesn't even exist, not even in an imaginary parellel universe. Interest is only a concept, it doesn't actually exist. It's a complete scam, a con game

 It simply never gets printed

 They only print more principle

If you're still not following me, imagine this: Imagine that they print 2 colors of money, red and green. The green colored paper is stamped "principle" and the red colored paper is stamped "interest". With me so far? Ok, so they loan you the green colored money which you in turn pay back to them. But where is the red colored money? They never even printed it. For you to be able to pay it back to them, they would first have to print it and GIVE it to you.

Get it?

Seems more and more that Zerohedge is targeting the 3rd grade elementary intellect

Tue, 07/24/2012 - 10:15 | 2645306 tooktheredpill
tooktheredpill's picture

really mktwtch? how about create a debt crisis that will require an emergency central gov? simple. its already started with the banking union

Tue, 07/24/2012 - 10:48 | 2645410 engineertheeconomy
engineertheeconomy's picture

You don't look well... are you sure you took the right pills this morning?

Tue, 07/24/2012 - 14:53 | 2646462 caconhma
caconhma's picture

Why are everybody so focused on interest rates and monetary issues?

The situation is much simpler: people and governments of EU and the USA are living well above and beyond their means. Consequently, somebody else must support them.

Just look at Spain. Its overall unemployment is 25% and the youth unemployment 50%+. People don’t have any desire to work and be paid accordingly to their productivity. People were brainwashed and their moral standards were deliberately perverted. Therefore, if tomorrow all debts will be cancelled and the old game starts again, there will be very few idiots to support US and EU parasites. It is that simple.

So, what to do? Here comes NATO with its new fascist new colonial wars of aggression.

Now, where are the working bodies to supports US and EU parasites? They are in Asia. Well, NATO cannot wage a war against China, Vietnam, Indonesia or North & South Korea. But these Asian nations are energy and natural resources poor. Here comes the world petro-dollar reserve currency and control over the Middle East oil & gas. The same goes for Russia huge store on natural resources. Since the present West-owned Russia government keeps the West going for the last 20 years.

Now, the US and EU have a big problem. China is becoming too strong and too powerful to claim a half of the Russian territory with most of its natural resources. If it will happen, the USA and EU are cooked! As of today, NATO is trying to control of oil & gas from the Middle East to China.

Tue, 07/24/2012 - 15:19 | 2646558 caconhma
caconhma's picture

The U.S. Army is preparing to suppress the riots

Manual of the U.S. Army Military Police for "Operations in the Civil Disturbances," has recently become known, describes how to use military resources in the country to suppress the rebellion, confiscation of firearms, and even murder of Americans in the United States during the massive civil unrest.

From this document, released in 2006 and designed for self-study in the military and police schools of the U.S. Army, it becomes clear that the operations described in the manual include CONUS and OCONUS, that is, the continental United States and the territory beyond its borders. The manual describes how military means can be used to "help local and state authorities to restore and maintain law and order" in the event of riots, civil unrest, or the declaration of martial law. Military means will be used mainly to break up unsanctioned meetings and patrolling areas to prevent violations of the unlawful acts, written in the document and stated that during the recovery operations of the order of the military may resort to a show of force, creating roadblocks, breaking up the crowds, to use poison gas for police operations, patrol, use of force or security provisions, and if necessary perform other operations. Guide also describes the procedure for placing prisoners in temporary internment camps under the instruction of the U.S. Army FM 3-19.40 "internment operations / movement" and "re-education" for the internment of 'positive assessment of U.S. policy "with the contents of the camps in the United States. The document contains a list of weapons for use against the rebels or protestors, including the police grenade. It requires the military to carry weapons in a safe position - the psychological tactics of the rebels for a show of force. It also provides non-lethal weapons and water cannons. This guide explains how the military may be involved in espionage and gathering information about dissidents to identify individuals, groups and organizations, particularly threatening or creating a disturbance. Toxic chemicals are also used for the purpose of suppressing the resistance. This suggests the troops and confiscating firearms. "Restrictions on the sale, transfer and storage of critical materials such as gasoline, firearms, ammunition, explosives, police forces will help to minimize some forms of violence" - the document says. In December 2008, "Washington Post" reported on plans to deploy another 20,000 employees of American troops in America, for the purposes of internal security after the September 2011 and expand the militarization of the country by means of Northern Command (NORTHCOM) in preparing for possible civil unrest following the total economic collapse or a massive terrorist attack. Released in the same year, the report of the Institute of Strategic Studies, U.S. Army War College warned that in a series of crises in the country may experience massive civil unrest, called a "strategic shock." "Widespread civil unrest within the U.S. defense establishment to reorient the force priorities in extreme situations to protect the basic domestic order and human security '- according to the report, signed by Lt. Col. Nathan Freyr. He adds that the military may be required to suppress purposeful domestic resistance.

Tue, 07/24/2012 - 15:40 | 2646629 engineertheeconomy
engineertheeconomy's picture

Correct

 I'll add even more to that

They are being funded with money and resources to the extent that most people will never have the capacity to comprehend

 A good analogy would be diverting the Niagra falls to put out a small campfire that already burned itself out years ago

To say that they will be ready, is an understatement

YOU WILL BE ABSORBED

RESISTANCE IS FUTILE

WE ARE THE BORG

Tue, 07/24/2012 - 17:57 | 2647283 tooktheredpill
tooktheredpill's picture

yep i don't feel that great given what is probably around the corner - but maybe ltro3 will finally fix everything, or like Tyler says, aliens decide to invest in Europe.

Tue, 07/24/2012 - 13:55 | 2646221 TPTB_r_TBTF
TPTB_r_TBTF's picture

So that's why dollars are green?!

 

Tue, 07/24/2012 - 09:55 | 2645211 French Frog
French Frog's picture

"It is a matter of limiting the involvement of taxpayers. They have already paid a great deal."

How very thoughful & kind

.-)

PS: do we still have to say 'sarc on/off' for those who don't recognise sarcasm ?

Tue, 07/24/2012 - 09:49 | 2645240 Remedial
Remedial's picture

In this situation the Euro would plummet.  This would be fantastic for exports.  Germany should do this, not for the greater good but because the alternative (reserve currency level strength Neu Deutschemark) would choke off their exports.  The key for them is creating a mutually assured destruction mechanism for the PIIGS, leave them to tear each other to bits...reap the rewards of a weakened Euro.  Eventually, the debt guarantee will convert southern Europe into a fiefdom of the north...but they needed saving anyway, culturally and economically.

Tue, 07/24/2012 - 09:37 | 2645212 RiverRoad
RiverRoad's picture

Might as well all just "forgive" each other and get on with the rebuilding which is going to take dozens of years as it is now.

Tue, 07/24/2012 - 09:59 | 2645262 ATM
ATM's picture

Oh yes they will.

Tue, 07/24/2012 - 09:15 | 2645172 Ethics Gradient
Ethics Gradient's picture

7) It is broke

Tue, 07/24/2012 - 09:19 | 2645182 kito
kito's picture

actually that is THE ONLY REASON NEEDED, the other six reasons are listed to justify the bank analysts job..........

Tue, 07/24/2012 - 09:22 | 2645188 GetZeeGold
GetZeeGold's picture

 

 

Give me six reasons why they won't get a bailout.

 

I'll be waiting over here......take your time.

 

Tue, 07/24/2012 - 09:28 | 2645198 Ethics Gradient
Ethics Gradient's picture

I like a challenge!

1) They need more money than is available.

2) Ze Germans wont give them any money.

3) The Finns will seek collateral the Spaniards don't have.

4) It would mean that a tiny part of Europe will be on the hook for all the bailouts.

5) Belgian caterers have gone on holiday for the summer.

6) They'll be able to print their own pesatas anyway.

Tue, 07/24/2012 - 09:46 | 2645208 GetZeeGold
GetZeeGold's picture

 

 

OK.....looks like I picked the wrong week to stop sniffing glue.

http://www.youtube.com/watch?v=GeI5ke0BENw

 

Seriously......just give them the damn bailout.....and let's focus on the next one.

 

Tue, 07/24/2012 - 10:01 | 2645269 Sofa King Confused
Sofa King Confused's picture

The solution is very simple and has been around forever.  If govts all over the world are so adamant about not writing off the debt thru bankruptcy, then, the only logical course to take would be confiscate all money and assets of the 1% and use the proceeds to pay off the debt. Also, hire an elite group of individuals that have a very special skill, lets say, people that could hit something the size of a soccer ball from 1000 yards, to finish the job.

Tue, 07/24/2012 - 10:19 | 2645324 engineertheeconomy
engineertheeconomy's picture

Wrong. It's only monopoly money and should only be paid back with monopoly money. It doesn't require much effort to make more paper ink and another printing press. Exchanging GOLD for monopoly money would be downright INSANE

Tue, 07/24/2012 - 09:39 | 2645207 milanitaly
milanitaly's picture

1 2 3 4 5 6 civil war and Spain knows it well

Tue, 07/24/2012 - 10:22 | 2645335 engineertheeconomy
engineertheeconomy's picture

Wrong. Thats the solution for our problems, not theirs

Tue, 07/24/2012 - 09:45 | 2645228 kito
kito's picture

well if i were a bank analyst, it would go something like this:

1) im a bank analyst and i have to be verbose..........

2) if im not verbose, i dont seem impressive............

3) if i dont seem impressive, i dont receive big bonuses.............

4) if i dont receive big bonuses, i dont seem impressive............

5) if i dont seem impressive, my fellow lemmings wont read my hollow prognostications............

6) if my fellow lemmings wont read my hollow prognostications, i dont seem impressive.......

....and there folks, you have the prototypical analysis demonstrating the analytical skills of an investment/bank analyst...........

Tue, 07/24/2012 - 09:16 | 2645174 firstdivision
firstdivision's picture

Same with US retailers.  The YoY graph shows that the consumer is broke again. http://bloomberg.econoday.com/byshoweventfull.asp?fid=450862&cust=bloomberg-us&year=2012&lid=0#top

Tue, 07/24/2012 - 09:16 | 2645175 hugovanderbubble
hugovanderbubble's picture

Call Mars, for bailout US please....

 

MARS CALLING¡

 

Good article.

Tue, 07/24/2012 - 09:18 | 2645179 bigdumbnugly
bigdumbnugly's picture

"the EFSF would first have to issue debt before having any cash to spend..."

has anyone seen the plunger?   this sh*t keeps getting backed up!

 

Tue, 07/24/2012 - 11:02 | 2645460 engineertheeconomy
engineertheeconomy's picture

 

Seriously, why not just charge 10,000% interest and then just take their entire country away from them the very next day and get it over with?

For that matter, why don't we do that here too?

That would be just as logical as anything that anyone else is talking about nowdays

 

Tue, 07/24/2012 - 09:19 | 2645181 Txo
Txo's picture

One of the few positives is that spain s public sector and both national and regional political castes are so oversized that there is a lot of room for spending cuts there. But it will require deep political changes that will be slow. Otherwise, it' s game over. The way it is today, Spain' s unsustainable no matter how much monopoly money the EU throw at it.

Tue, 07/24/2012 - 09:19 | 2645184 spastic_colon
spastic_colon's picture

7 - because the USSA needs them too

8 - because the USSA needs more headlines into AAPL earnings

9 - because the USSA equity markets actually had a few red days

etc. etc.

Tue, 07/24/2012 - 09:23 | 2645193 Mae Kadoodie
Mae Kadoodie's picture

And we would all go down together..

 

Tue, 07/24/2012 - 09:25 | 2645195 gatorengineer
gatorengineer's picture

Dont forget about a Marshall plan for Europe courtesy of Benny and the Jets, that is becomming increasingly more probable.....

Tue, 07/24/2012 - 09:28 | 2645197 debtor of last ...
debtor of last resort's picture

Fuck off, we have chemical weapons along the borders.

Tue, 07/24/2012 - 09:36 | 2645210 GetZeeGold
GetZeeGold's picture

 

 

Don't move......or the dummy gets it!

 

Tue, 07/24/2012 - 09:44 | 2645226 unrulian
unrulian's picture

...and soon as the wind is right you're getting it

Tue, 07/24/2012 - 09:48 | 2645232 GetZeeGold
GetZeeGold's picture

 

 

Looks like we're waiting......again.

 

Tue, 07/24/2012 - 09:33 | 2645205 Conman
Conman's picture

Well id buy that if they didnt already get a soveirgn bailout via the bank bailout. Calling a turd a flower doesnt make it a flower.

Tue, 07/24/2012 - 09:43 | 2645219 falak pema
falak pema's picture

down on your knees Spain; pride must bend knee to the Squid and Draghi and no questions asked. We now own you and Merkel and us of ECB will run you, pump you then dump you dry; leaving u to socialise the abyssal debt in your abysmal economic ignorance fed on macho hubris; as we will have fleeced you of your last wool on your Own Santander type bankster backs. Game over for Sovereign, regions AND spanish banks. 

Euro rape is such a fun game isn't it! 

Tue, 07/24/2012 - 09:41 | 2645221 JenkinsLane
JenkinsLane's picture

Maybe Spain could lease the Spanish football team? They could temporarily renounce their citizenships, adopt an alternative one (I'm thinking

Middle East here), then revert to Spanish citizenship once they'd won the World Cup.

 

Given that Sheikh Mansour has spent approximately £1B for Man City to win the Premiership, you've got to figure the UEA would cough up

at least £500m to win the World Cup. If 50% of the proceeds went to the Catalonia region, it would help to sell it to the team. Plus, the UAE

is never going to win the World Cup any other way.

 

Obviously, this cracking idea is my intellectual capital so if it does go ahead my "genius fee" will be a very reasonable 10 basis points,

a trifle given the benefit to both parties.

Tue, 07/24/2012 - 10:00 | 2645265 Joe A
Joe A's picture

But Spain was not Uganda and the Euro was saved, said Rajoy. And Guindos yesterday said that Spain does not need a bailout. Could it be........they lied?

Tue, 07/24/2012 - 10:18 | 2645318 TrainWreck1
TrainWreck1's picture

This time the bailout will work.

 

 

 

lol

Tue, 07/24/2012 - 10:19 | 2645321 ElvisDog
ElvisDog's picture

Europe is officially the most boring financial news story of all time. Just fucking do it already instead of talking us to death about it. I don't even read the stories any more about "Draghi said this" or "Merkel hinted at that" or "Troika arrives in Greece". My one hope now is that the Five Star guy somehow wins the election in Italy.

Tue, 07/24/2012 - 10:28 | 2645350 engineertheeconomy
engineertheeconomy's picture

My one hope is that the Ebola virus gets out and mutates to the point where it only infects Bankers, Politicians and Warmongers

Tue, 07/24/2012 - 11:02 | 2645461 Satan
Satan's picture

Spain is too big to bail. We live in interesting times.

Tue, 07/24/2012 - 11:34 | 2645566 Dareconomics
Dareconomics's picture

If one looks at the Spanish central government’s debt, things do not look so bad. The Spanish debt to GDP ratio is officially 72% and they only need to obtain about €26bn in financing between now and the end of the year. The problem is that these figures do not include their regions, akin to our states. The regions have been shut out of the markets and must now be financed by the central government or default. Adding the regional debt burden together with the national, Spain needs about €62bn for the rest of the year with a Debt to GDP ratio of over 100%.

In order to meet those ridiculously rigorous deficit targets promised to the Germans, something had to give. That something was transfer payments to the regions, which are now dragging the whole operation under. A similar problem is occurring in Italy starting with Sicily, which I wrote about last week. This is not just a European problem. California has been reducing payments to its municipalities for three years now, and this has resulted in the bankruptcies of Stockton, San Bernadino and Mammoth Lakes with more to follow.

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