From Mark Grant, author of Out of the Box
To Providence I Commend You
“'Tis now the very witching time of night, when churchyards yawn and Hell itself breathes out Contagion to this world.”
-William Shakespeare
The Immortal Bard must have been referencing Madrid when penning these lines or, if not, would likely approve of their application this morning. The nationalization of Bankia, the third largest bank in Spain, is not some isolated event that is singular and alone in nature regardless of the expected dampening and muted words and phrases issued by the Spanish government. The cancer has been identified but not isolated and you may be assured that it remains in the lymph nodes of the two major banks in Spain. Fortunately, during America’s financial crisis, many of the sub-prime mortgages were securitized and no longer resided on the balance sheets of the American banks. In the case of Spain we find not only the majority of the mortgages resident at the Spanish banks but we find an added dimension which is a huge amount of money lent to Real Estate developers which is impaired and still on the books of the Spanish banks. Further, in my opinion, none of these loans have been accurately accounted for and they are being carried at whimsical valuations by the banks or pledged as collateral at the ECB where the Spanish bank funding jumped 50% in one month and now stands at $294 billion. Following the bouncing ball; there is now so much encumbrance of assets between pledged collateral and covered bond sales that the actual worth of the two major Spanish banks is now someplace between “not much” and “De minimis” should the situation deteriorate to the point of impairment.
The Bankia nationalization also required a further injection of capital from Spain which obviously impacts the balance sheet of the sovereign as the government issues press releases trying to obscure the obvious. In Spain for the banks and for the country the math just does not work as unemployment and austerity measures are a toxic cocktail that will soon causes the drinkers to cry out for medical assistance. The jump in ECB loans is the first stage cancer but you may expect a major worsening and a higher level soon where both the country and the banks will require life support from some European institution and in a size that cannot be afforded without toxic shock in other nations. Consequently I again issue a warning on Spain and their banks and advise a great distance between you and them!
Greece-The Situation Grows Perilous
The argument for months was that Greece was such a small country that it hardly mattered and why was everyone focusing on Greece. I pointed out that the total debts of this country stood at $1.1 trillion and, since then, have gotten bigger even after the PSI took place. In fact, Greece borrowed $130 billion to pay off $105 billion and the ECB/EIB and the IMF refused to take the hits. Now just the country, the sovereign, owes $517 billion to various parties both public and private which is not only an astronomical number for a country of this size, about the same as the total GDP of Switzerland, but one that cannot be paid back by any stretch of anyone’s imagination. The 120% debt to GDP ratio flaunted about by the EU and the IMF some months ago is the stuff of nonsense, fairy tales and stories that would please the Brothers Grimm. Greece has been a continuing saga of make believe, hopes and prayers answered by no one as the nation is far past the gates that guard the entrance to Hades. Now it appears as if there will have to be another election in June as no one can form a government and the second most populous party wants to either renegotiate the terms of the IMF/EU agreement or leave the Euro and devalue to save the country’s finances and the Greek pride. If this should happen the consequences for the rest of Europe will be severe. You could start with the fact that it would wipe out, by approximately three times the total equity capital of the European Central Bank. If Greece defaults it would not only wipe out the new bondholders but impair the EIB and have a telling effect on the IMF. It was never the size of the country but the size of their debts and in an effort to protect the German and French banks at the time a monster was created by abysmal thinking and the fanciful notion that austerity would solve the problem which it plainly has not.
Then besides all of this there is the $104 billion owed to the other Euro nations through the Stabilization funds, the $65 billion of Greek bonds bought by the ECB to try and hold down Greek yields and the $135 billion in Target2 funds that the Greek Central Bank owes to the other central banks in Europe. Then it is just the sovereign debt, not the bank debt and not the derivatives and not the private debt and not the municipal debt but just the country that owes $874 billion which is just shy of 300% of their total Gross Domestic Product. $874 billion is also 27% of the total GDP of Germany and the numbers are not just frightening but very scary.
Greece is now long past the point where growth or Inflation can bail it out. The Europeans have played this game very badly in the attempt to hold the coalition together. The can kicking, heralded by so many as an achievement, has actually exacerbated the situation from a travesty to somewhere out past a calamity and there is no longer any way out without fiscal pain of the most serious kind whether Germany refuses additional funding or whether Greece opts out for their own reasons. We sail at the center of the maelstrom and the markets, quite soon in my view, will one day waken to the “Oh My God” moment which everyone has tried so hard to avoid. There is no longer any way out!
“To that Providence, my sons, I hereby commend you, and I counsel you by way of caution to forbear from crossing the moor in those dark hours when the powers of evil are exalted.”
-The Hound of the Baskervilles