Via Mark J. Grant, author of Out of the Box,
“It is an old saying; the Devil lurks behind the cross. All is not gold that glitters. From the tail of the plough, Bamba was made King of Spain; and from his silks and riches was Rodrigo cast to be devoured by the snakes.”
-Miguel de Cervantes, Don Quixote
It was not so long ago that I spoke at the “Strategic Forum” which was sponsored in part by TD bank. After my presentation about Europe where I had stated, quite clearly, that Spain would hit the wall I found myself accosted by the economist of one of Spain’s major banks. Fortunately Craig Alexander, the senior economist at TD, was walking next to me and as the quite impolite lady from Spain tried to verbally incase me in the famous “iron lady” of the Spanish Inquisition he grabbed my arm and led me out to the patio to speak with some other people and so saved me from not only the diatribe of the loca senorita but from saying several impolite things which I was about to say in retort. As I consider the latest data about Spain I think of this incident and take some delight in saying, “I told you so” or other things inadmissible in my commentary.
To use the analogy offered by Senor Cervantes I would say that Rodrigo, as representing Spain, is about to be devoured by the snakes. The central bank of Spain just released the net capital outflow numbers and they are disastrous. During the month of June alone $70.90 billion left the Spanish banks and in July it was worse at $92.88 billion which is 4.7% of total bank deposits in Spain. For the first seven months of the year the outflow adds up to $368.80 billion or 17.7% of the total bank deposits of Spain and the trajectory of the outflow is increasing dramatically. Reality is reality and Spain is experiencing a full-fledged run on its banks whether anyone in Europe wants to admit it or not.
The Spanish ten year now yields a 6.81% and their thirty year is yielding 7.34%. Spain has now set up a fund for its regions to tap of $22.6 billion and this, in my opinion, will not even be close to what is asked for or required with the regions needing some $50-75 billion in assistance in my estimation. Many of the regions in Spain are not paying suppliers or their other local debts and the situation is clearly out of control.
In October Spain has $25 billion in sovereign debt maturing plus will be adding new debt under their current plan so that the snakes are not only coming out from under the rocks but dropping from the trees. On top of this Bankia, late Friday, reported out bad loans of $8.24 billion and an operating loss of $5.58 billion causing the government to go into hyper-drive and promise to inject $5-6 billion into the bank immediately to prevent its collapse. If funds from the EU/IMF are to be utilized, which has been widely discussed, a very political problem arises. Bankia has issued preferred shares to many of their depositors and they would be wiped out if the European money is utilized under the current regulations which would cause Mr. Rajoy more than a few problems and could send people back into the streets. Then Spain has the highest unemployment rate in Europe, even higher than in Greece, with a 25.1% jobless rate. For those under twenty-five the job situation is extreme with a 53% unemployment rate.
"Was there ever a people whose leaders were as truly their enemies as this one?"
-Ernest Hemmingway, For Whom the Bell Tolls
The River Runs Dry
Between December of 2011 and the end of March 2012 the Spanish banks bought $109 billion of the Spanish sovereign debt. Much of this was facilitated by the ECB who lowered and lowered again the collateral rules and handed the money to the Spanish banks in such a size that bad things, very bad things will result if Spain hits the wall and defaults. Then since March, as forced by their own inadequate capital positions, the trend has reversed and the Spanish banks have sold $21.3 billion of Spanish sovereign debt with $11.7 billion in July alone as capital flees from the Spanish banks and the actuality of the balance sheets overcomes the “dynamic provisioning” that helped to cause the fantasy.
The friendly “suggestions” by national governments in Europe are also getting a push back from European buyers. BNP recently imposed a $12.5 billion debt limit by country and many other banks in Europe are following suit. BNP has reduced their sovereign debt holdings by 35% since June 2011. In July, the aggregate of sovereign debt reduction for all of the French banks was $8.7 billion as they took advantage of the ECB speculation to lower their holdings.
The Cries of Desperation
Spain’s Prime Minister’s rather comic call that his country’s heading into bankruptcy was a “victory for all of Europe” is more properly found in some Theatre of the Absurd. The recent rants and raves by the Prime Minister and the Finance Minister that the ECB should buy their debt without limit is an obvious last ditch Hail Mary pass before the plunge into the financial abyss begins. The ECB may not require audits of the national government or of the regional governments or the Spanish banks but the ECB pledge of Mr. Draghi is dependent, you may recall, on the EU and the various stabilization funds’ use and alone, or with the IMF, audits will be demanded by many countries and the results of the “dynamic provisioning” will be found to be just what I have asserted I would bet which is the juggling of the books for all three entities. The gasps for breath will be resplendent in Paris, Berlin and in Brussels and panic attacks will be on the rise in many European capitals. Spain has begun the well-worn “walk of shame” already traversed by Greece, Ireland, Cyprus and Portugal.
There are some major flashpoints coming soon in Europe. One is the ruling by the German Constitutional Court on September 12 whether the ESM is legal in Germany or not. While it is widely expected that the High Court will go along with the program; who knows? On Tuesday, September 4, Draghi will release his “save the world” plans to the European Central Banks ahead of the next ECB meeting which begins on September 5. There is a huge and serious division between Mr. Draghi and the head of the Bundesbank. There were rumors last week that Jens Weidemann, head of the German Central Bank, might resign over the policies about to be proposed by Draghi. Here we have the troubled nations and the healthy nations of Europe locked in mortal combat in what could become a very serious situation. It is the haves versus the have-nots and where the needy countries have more votes as one nation after another has gotten into financial trouble. Draghi may well put the funding countries in such a position that local politics will not allow what is going to be asked of them and “refusals to fund” could be the result which would throw the ECB into chaos. I expect a very rancorous session at the ECB with potentially explosive results. Even if the outcome is muted by the connection to the EFSF and the possible ESM, the funding may not be available when all is said and done by the individual nations and so the ECB’s bond buying or other forms of Quantitative Easing may be stopped dead in their tracks by any form of help being appended to programs that may not function. I personally think that Draghi has vastly overplayed his hand and that expectations based upon his frothy comments may prove to be without merit.
Also this week we will get the release of Barroso’s ambitious plans for bank oversight. He will announce a Brussels type bureaucratic scheme where the ECB will oversee all of the banks in Europe. This would be one more blow to national sovereignty and I expect a major push back from a number of countries. Germany has already come out against the concept stating that the ECB should only regulate the 25 largest banks in Europe. The plan will be put on the table no doubt but here I think that whatever may come eventually will bear little resemblance to the proposal that will be soon released. With the current trend in Europe becoming decidedly more nationalistic I think this new grand scheme will have little chance of success as proposed.
The End of the “Muddle”
We are now at the virtual epicenter of the European Crisis where decisions will have to be made; avoidance is no longer possible. We have reached the end of the road where there is no more path left for can kicking. It is now and here and in the next few weeks where the rock and the hard place will converge and explosive political and economic consequences may result. The “future” has arrived in the “present!” “Now” is “Here.”
Greece---to fund or not fund and bear the costs and market reaction.
Spain---about to go bankrupt and to fund or not fund and how to do it. Expect quite serious reverberations in Spain and in Europe as the amounts of money involved are not trivial. The Firewall has been breached. Expect Firestorms.
Italy—soon to join the long line asking for alms.
The ECB---a major fight where the troubled countries will demand so much from Germany that politics in Berlin may not allow for giving what will be demanded of them.
The ECB---a grand plan to be put forth that will pit the Bundesbank against most of the other Central Banks in Europe.
"You only heard the statement of the loss. You did not see the father fall as Pilar made him see the fascists die in that story she had told by the stream. You knew the father died in some courtyard, or against some wall, or in some field or orchard, or at night, in the lights of a truck, beside some road. You had seen the lights of the car from down the hills and heard the shooting and afterwards you had come down to the road and found the bodies. You did not see the mother shot, nor the sister, nor the brother. You heard about it; you heard the shots; and you saw the bodies."
-Ernest Hemingway, For Whom the Bell Tolls
There will be bodies.