While the Reuters story, which we noted earlier [8], and which speculated that a no-strings attached bailout of Spanish banks may be coming courtesy of a German stealth funding of the nearly empty Spanish bank bailout fund, has been making the rounds over and over, the latest incarnation of the underlying narrative, brought to us courtesy of the FT [9], has a novel twist: "EU officials are also debating the size of the loans needed. Senior Spanish banking executives have put the figure at about €40bn, but EU officials have been looking at plans that are at least double that, according to people briefed on the discussions." In other words, just as we speculated, Goldman's big picture estimate [10]of Spanish bank funding needs was woefully inadequate, and once the dirty truth is uncovered, it will become apparent that losses, which at this point are nothing more than capital shortfalls from deposit runs, are far, far greater than anyone speculated. It also means that the disconnect between the European reality, and what the media and politicians are spoonfeeding the gullible public, has hit unprecedented levels. Finally, once Germans once again realize they have been lied to, what happens then: will they simply fork over the cash as rumored, or will they finally say enough? According to this lead article in German Welt [11], the answer is not looking too good for the broken European monetary experiment.
From the FT [9]:
Spanish officials and bank regulators are confident that the IMF will conclude that the recapitalisation needs of the country’s banks – principally the former cajas that make up Bankia, Catalunya Caixa and NovaCaixaGalicia – will be more modest than many foreign analysts assume.
Despite the urging of Brussels and Paris, officials said direct bailout loans to troubled banks – bypassing the Spanish government – have been ruled out. Regulations for the current €440bn eurozone rescue fund and its permanent €500bn successor forbid such direct capital injections and changing the rules would take too long to come quickly to Madrid’s assistance.
Instead, one of the options under consideration is to provide the bailout aid directly to Spain’s bank rescue fund, known by its Spanish initials Frob.
If required, the European Financial Stability Facility, the eurozone’s bailout fund, could rapidly inject bonds directly into Frob.
Naturally, the biggest problem with this scheme, is that it simply plugs a leaking vortex: as more Spanish real estate losses bubble to the surface, and more deposits are withdrawn, more, and more, and more cash will have to be provided by Germany. And today's initial doubling of bailout estimates is just the beginning: the final cost before German taxpayers finally revolt in disgust with what is nothing but a direct Spanish bank bailout, will be orders of magnitude higher. And so the sunk costs of Europe's continental bailout will continue to soar.
But why?
“Eurozone member states have an incentive to design a programme that would emphasize banks and be ‘conditionality light’ to facilitate Rajoy’s ability to manage his domestic constraints,” said Mujtaba Rahman, a Europe analyst at the Eurasia Group risk consultancy. “The longer the Spanish situation drags out, the greater is the risk that Italy will also come back into play.”
And there you have it: at the end of the day, it is all about preventing delaying the realization that the Italian financial sector is just as broke as that of Spain.
Needless to say, a Spanish FROB refill won't halt the crisis. It will merely delay it. And the outcome will still be the same. But at this point delaying the inevitable collapse is really the only option Europe has. If it means some more Germans lose what is left of their wealth, so be it.