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Spain IS Greece After All: Here Are The Main Outstanding Items Following The Spanish Bailout
After two years of denials, we finally have the right answer: Spain IS Greece. Only much bigger (it is also the US, although while the US TARP was $700 billion or 5% of then GDP, the just announced Spanish tarp is 10% of Spanish GDP, so technically Spain is 2x the US). So now that the European bailout has moved from Greece, Ireland and Portugal on to the big one, Spain, here are the key outstanding questions.
1. Where will the money come from?
De Guindos, Schauble and the Eurogroup, all announced that the sole source of cash would be the ESM and/or the EFSF. The problem with this is that the ESM has yet to be ratified by Germany, whose parliament said previously it is sternly against allowing the ESM to fund a direct bank bailout, something which just happened. Thus, the successful German ESM ratification vote, whenever it comes, and which previously was taken for granted, now appears to be far more questionable.
Which leaves the EFSF. The problem with the EFSF is that there is about €200 billion in dry powder. And this includes the Spanish quota of €93 billion, which we can only assume is now officially scrapped.
Which brings us to a bigger question: now that Spain is officially to be bailed out, what happens next. And by that we mean of course the big one: Italy. Recall that as we posted in Brussels... We Have A Problem, once the contagion spreads again to Italy, and that country also needs a bailout, it is game over. From the world's biggest hedge fund Bridgewater:
In other words, it is very likely that the funding for the Spanish bailout will have yet to be procured. Who will provide cash which is virtually certain to disappear forever in the Spanish real-estate market mismarking vortex?
2. Where will the money go?
According to the de Guindos press conference, the bailout cash will go to the FROB, or the Fund for Orderly Bank Restructuring: as the name implies a sinking fund to fund insolvent banks. This is merely a liquidity vehicle to net out evaporating capital due to realistic marks of assets, or ongoing deposit flight. However, a far bigger concern is how will the FROB be treated from a sovereign debt perspective?
As was noted previously, the bailout will come in the form of a loan, which while at better terms than market, will still result in a material increase in Spanish debt/GDP. In other words, while the bailout itself may have been without sovereign conditions, it will still impair the country in the eyes of sovereign creditors. And just as important is the mention that the loan will have "better terms than market" - this implies added security compared to general Spanish obligations. Hence priming.
Recall the official breakdown of the complete Spanish debt, presented here courtesy of Mark Grant 2 months ago:
The Data
Spain’s GDP $1.295 trillion
SPAIN’S NATIONAL DEBT
Admitted Sovereign Debt $732 billion
Admitted Regional Debt $183 billion
Admitted Bank Guaranteed Debt $103 billion
Admitted Other Sovereign Gtd. Debt $ 72 billion
Total National Debt $1.090 trillion
SPAIN’S EUROPEAN DEBT
Spain’s Liabilities at the ECB $332 billion
Spain’s Cost for the EU budget $ 20 billion
Spain’s Liabilities for the Stabilization Funds $125 billion
Spain’s Liabilities for the Macro Fin. Ass. Fund $ 99 billion
Spain’s Guarantee of the EIB debt $ 67 billion
Spain’s Total European Debt $643 billion
----------------------------------------------------------------------
Spain’s National and European Debt $1.733 trillion
Spain’s OFFICAL debt to GDP Ratio 68.5%
Spain’s ACTUAL Debt to GDP Ratio 133.8%
* * *
Now we have another €100 billion or so in admitted sovereign debt to add to the top of the list. In other words, total Spanish admitted debt will likely increase by up to 17% from $732 billion to $857, adding the $125 billion FROB "loan."
3. What happens to Spanish sovereign debt?
Perhaps the most important thing to note in the above analysis is that the FROB loan is effectively a priming DIP: think Troika loans to Greece, Ireland and Portugal.
In other words, Spanish bondholders just got their first taste of subordination!
Basically, first thing Monday the trade off will be: does the temporary improvement in bank solvency offset the fact that bonds just got primed, hinting at a future that in the case of Greece has resulted in the old Greek bonds trading an equivalent price of sub 10 cents on the dollar.
How long until Spanish bondholders get the hell out of Dodge, knowing quite well that their Spanish bond holdings will suffer the same fate as GGBs?
Our advice for those who need to have exposure, as we wrote 5 months ago: sell local-law, covenant-lite Spanish bonds, and buy their UK-law, covenant-protected cousins.
Then sit back and watch the spread explode.
4. Precedent
Naturally with Spain now officially biting the bullet, the only question remaining is: when is Italy going to drop next.
And ironically, what just happened, is that the Eurozone, with the tacit agreement of Germany, essentially gave insolvent banks a green light to short themselves into a full bailout.
How long until Italian banks get the hint, and proceed to short each other, or themselves, either with shares of stock or , better yet, through CDS which unlike in the sovereign case, can be held without an offsetting cash basis position. In other words: is it time for the Italian bank suicide trade?
Because only when they are on the verge of nationalization, will Italian banks be rescued. And remember: he who defects (or in this case drops the fastest), first, reaps the biggest benefits of the resultant action.
We also wonder how will Ireland feel knowing that it has to suffer under backbreaking austerity in exchange for Troika generosity, while Spain gets away scott free.
Finally, there is the question of how today's action will impact the Greek elections. As noted earlier today, today's precedent will likely serve as a huge boost to the popularity of Syriza. Oh yes, the Greek elections next Sunday. Remember those, and the whole Grexit thing?
5. Market reaction
The long-term reaction is obvious: this latest confirmation that Europe is a sinking ship has been predicted by many for years. As such, that European risk markets will continue sinking, and capital flows continue rushing to Germany, is a given. In the short run, however, courtesy of a new all time record high number of EUR shorts (at a record -214,418 net non-commercial contracts as of this past week) it is likely we may see an aggressive short covering squeeze.
This will send all risk higher as well. Of course, the really is to be faded aggressively as soon as the weak-hand shorts capitulate and cover.
* * *
For those curious just what this mysterious FROB is, which simply stated is, or rather was, a woefully underfunded FDIC equivalent, and is now the Spanish banking system loophole, here is a succinct presentation:
* * *
Finally, for those wondering if today's action will halt the catalyst for the entire move, namely the furious bank run that Spain has been experiencing in the past month, we don't know. It likely all depends on how many Spiderman towels are in circulation and held in inventory by Spain's insolvent banks.
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So you're holding present day Spaniards responsible for what Cortez, Pizarro, and Columbus did 500 years ago? Seems rather narrow-minded.
To counteract the movement to the US dollar and trash it Bernanke will swap US dollars for debt. The IMF can act as a front for the bailout of the world by the wizard of OZ, Bernanke. Benanke will do what he does best, print. Beware of the man behind the curtain.
"Beware of the man behind the curtain."
How 'bout...
Beware the Prominent Tool of little boys behind the curtain.
Maudlin with a must read article IMO. Courtesy Barry Ritholtz.
http://www.ritholtz.com/blog/2012/06/a-dysfunctional-nation/
I don't see how the Euromdoesnt get destroyed over the next few weeks and months.
Anyone else hear the rumor that Texas Governor Rick Perry is posting to this blog using the screen name Rat Army or something like that ?
I'm going to read through the posts and see if I can find someone who can't spell, uses profanity to make points when logic fails them, believes in ridiculous global conspiracies and racist clap trap, and believes in Texas (and the US) Uber Alles. Oops, that didn't take long.
Rodent Freikorp.....yes you, put down the meth pipe and back away from the keyboard. You need sleep, tomorrow is a another day. Start fresh.
Not this again:
http://finance.yahoo.com/news/europe-works-euro-zone-bond-185524097.html?l=1
Europe works on new euro zone bond plan: report
BERLIN (Reuters) - German news magazine Der Spiegel reported on Saturday that leaders of European institutions are working on a comprehensive plan to rescue the euro that would include the issuance of joint euro bonds - a move Germany has repeatedly rejected.
The news magazine said European Union Commission President Jose Manuel Barroso, European Council President Herman Van Rompuy, Euro group head Jean-Claude Juncker and European Central Bank President Mario Draghi are working on plans for a "genuine fiscal union" in which individual member states would no longer be able to independently take on new borrowing.
Governments would only be able to decide how to spend money that is covered through their revenues, Der Spiegel reported. Any country that needs more money than it takes in would have to report that need to the group of euro finance ministers.
The magazine quoted four high-ranking EU planners saying this group of finance ministers would then decide which financial desires at which levels were justified and would then issue joint euro bonds to finance these new borrowing needs.
Sooner or later the Bundesbank will say enough and leave them to their own devices.
“…this group of finance ministers would then decide which financial desires at which levels were justified and would then issue joint euro bonds to finance these new borrowing needs.”
Déjà vu? And some still wonder how the wealth of nations fall into the hands of the international bankers and business cartels...
“If we want to make clear in one sentence the direction in which the modern political economy is moving we can say: the stock-exchange agents of the banks are becoming an ever-increasing measure the dictators of economic life. All economic happenings are more and more subordinate to the decisions of finance. The question whether a new industrial undertaking is to spring up or an existing one to be developed; whether the owner of a shop or a store is to get the means to extend his business, all these questions are decided in the offices of Banks and Bankers.” -- Professor Werner Sombart summing up Europe’s situation in 1911.
"Whoever controls the volume of money in any country is absolute master of all industry and commerce... and when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate." President James Garfield
“The great monopoly in this country is the money monopoly. So long as it exists, our old variety of freedom and individual energy of development are out of the question.” President Woodrow Wilson [in “Other People’s Money”]
AmenRa...
Is that the AmenRa I think it is?... How goes it old friend?
~francis_s
Enough bail-outs.I want one bail-in.In my account.But as everyone here,i know this is not possible,so keep staking..bi...t....c..h..e...z.
Gold will soar on Monday, or Tomorrow night rather. It is now quite obvious if it wasn't for a lot of folks (here is that word again) that the only possible outcome is some serious printing to paperover the debt blackhole across the planet.
Because more of this excessive printing will have to come out from Europe, even as the US prints to cover their deficits, the EURO will still be crushed as they have to print a lot more. As the USD goes even higher the US stocks markets will also get crushed as their foreign earnings will translate into less earnings in $USD, therefore lower eps.
GOLD however should move up significantly in unison with the Dollar.
All other commodities will get crushed as well....................
if you wanted a catalyst for the infamous wave 3 down, there you have it, THANK YOU SPAIN FROM ALL US SHORTS!!!..........................100 SPX points down Tomorrow would not surprise me one bit. FAT FINGER must be chewing his nails now......................
Nah I think the euro shorts will get squeezed short term and you will get a short term pop, and then the rally should fade while we focus on Greece. Also the other wildcard is rating agency action this week which will probably be negative.
Gold will likely also pop but watch out if Syriza gets enough votes a week from now.
There`s also the Ireland wildcard. If Ireland demands to renegociate its bailout, what then? Seems it`s already moving in that direction.
Yes, downgrades can come at any minute, hitting France, Germany as result of another bailout. What would happen then?
Syriza is poised to win a majority in upcoming elections and Spain`s bailout just guaranteed that victory. What would happen then?
What if Italy colapses while all this drama unfolds? They`re so desperate, they wanna start taxing the Vatican which would be a first in history.
Also, consider all those massive EU shorts. What do they want to see happening?
As far as I'm concerned the only reason why Greece is still in the EU currency even after Structured Default, is because Germany / Netherlands / Other is forcing them to otherwise they will lose their AAA rating. WHen they lose that rating the markets tank bigtime. If I was Greece I would stick it to Germany and bail from the Euro.
Up next Italy.
I don't think I have seen anyone comment on the CDS exposure on Spain,public and private.
Is this all hedged and contained? I expect the OTC stuff is sold in New York,J P Morgan?
The problem with shadow banking is noone knows where all the stinky landmines are...
The problem with Spain starts and ends with Football, the game where one kicks the balls, and not run around with it with your hands like in the US. Spaniards have been spending money on football players salaries. They should nationalize their football clubs and eliminate high salaries as part of their austerity plan.
http://www.therichest.org/sports/highest-paid-football-players/
FC Barcelona - Lionel Messi EUR 31 million
Real Madrid - Cristiano Ronaldo EUR 27.5 million
Real Madrid - Ricardo Kaka EUR 19.3 million
I thought this ship was unsinkable.
I'm going to send a very sternly worded letter to the White Star Line about this.
Sounds like a plan. Invite all of the NWO proponents on an unsinkable cruise liner.
See like I said, If they has given out Silver Surfer towels, all of this could have been avoided.
The moral of the story? Make sure you give out the right towels.
Please remember to vote for me as new Fed Chairman, as from the above you can see I am extremely qualified.
;-)
Believe that the GDP of Spain is 1 trillion euros, is something like believing that their debt is 68% of GDP.
Jose el plomero better pull his euro funds from the local bank pronto and either hold the cash or convert most to a healthy currency because the value of the euro is likely to plunge as the writing on the wall gets clearer
"Where will the money come from?" Well, government just continues to print more money and thus kick the can down the road for another six months. Great article again! Thank you so much!
I bet the HFT's already have smoke pouring out of them in anticipation of buying tomorow. I won't be surprised to see a 500pt up move tomorrow. DOW 36k and 36% unemployment on the way lmao.
Just goin by history the market should move down. It takned badly when "TARP" was announced until March 9, "TARP" was introduced on October 8 (6 Months) before. The Europeans are not doing enough as evident by the other article on the site. The Acutal Spanish bailout will need to be around 350 billion dollars 33 % of GDP. Just think 8 trillion was given to American banks with TARP. Also many Europe questions still remain. How do they get the money? Why did it not come with austerity measures like with Ireland and Greece. If the market takes this news well if it does at all it will be short lasted.
I agree with you !!!! SPX tanked to 666 form TARP time to March 9 (5 months actually), but also GOLD stocks more than doubled in that time frame, $HUI went from 150 to near 350.
It is amazing how short memories are!!
I like gold as a diversification against inflation in other countries, but correct me if I'm wrong here. As past history states that devaluing currency (aka printing) is the appropriate response instead of asset sales, hence Gold went from 150 to 350? But Europe is different, only because of the fact they have different interests. IE Switzerland; they have been buying Euros to keep their currency in check, and Europe which has increased their gold holdings because they think their products warrant higher prices because they are of better quality. IE cars, clothes, food etc.
I believe the only way European banks will be able to fund the bailout is to sell their gold (Their banks are like ours, mostly gold with very little cash). If Europe does not in fact have the cash available they will have to hold an asset sale, which would require selling their vast gold reserves, which would imply downward pressure on it in the short term and upward pressure on the dollar (Swiss buying Dollars from Euro purchases).
My third question. Since the USA has the largest gold holding in the world and since the dollar is not backed by gold at all anymore, what is the point of having any at all? I know they value it at 42 dollars a ton, which is much less than the "market value". They have been selling gold like crazy for decades now, are they just trying to get the best price? Or are they holding it because they know it will increase in value?
I actually prefer silver. It has other uses.
http://www.fms.treas.gov/gold/current.html
Your Thoughts?
I guess it is isn't worth noting that instead of giving the Banksters another FREE 125 Billion Euros to set on fire, they could have employed over HALF of Spain's unemployed at a wage of ~34,000 Euros each. This would have boosted demand, boosted production, boosted Tax Revenue, and ultimately helped make the Banks a bit more sound.
But, apparently, that route is too slow, or too sensible ,or something, so-- Free Money For Banksters!
I guess it is also meaningless to notice that "Moral Hazard" only ever seems to apply to giving the Little People Free Money, or helping them in any way. It is ALWAYS the right, fit, upstanding, and morally proper thing to give Rich Guys in Nice Suits Free Money to set on fire at the casino.
Pardon me for noticing.
Once one of the PIIGS get loan forgivess and speical deals all the members want it. Greece may have been too big to fail, but Spain and Italy are even bigger.
Spain and Italy you can now dictate terms you want to Brussels!
Threaten to implode the Euro and create fear in the Brussel banksters.
News Flash: Rafael Nadal takes first set of French Open final from Djokovic, 6-4.
There is at least one Spaniard deserving of respect as a man. How many more?
Stand up, Spaniards, Italians, Greeks, Frenchmen, Germans, Poles, Brits and you dumb-ass 'Mericans with all your guns and ammo.
We outnumber them something like 100000000-1.
Chicken. Shits.
Emotionless forex trading setups: http://capital3x.com/think-tank/emotionless-trading/
You have to give Spain some credit for being the best at SOCCER and Tennis in the world, but when you have 20% unemployment what the fuck do you do? they spend their time playing with their balls and they get good at it!
At least they do something healthy while unemployed americans just eat junk food and watch stupid Hollywood shows like IDOL, The Kardashians, Bachelor shows and all the other garbage that fills American TV ................
With all this free money flowing there is no reason for any nation to exit the euro. Do you see why none of the " lazy" countries will leave, Tyler? Germany will have no choice soon.
Should be an interesting day on the bond markets tomorrow.
Will the ECB intervene?
Rally warning from last week:
'Daily chart now gives bullish warning and significant
SPX rally & USDX retracement should commence in a week or so'
http://www.zerohedge.com/news/2012-12-24/market-analysis
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