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The Spanish Bank Bailout: A Complete Walk Thru From Deutsche Bank

Over the past 24 hours, Zero Hedge covered the various key provisions, and open questions, of the Spanish bank bailout. There is, however, much more when one digs into the details. Below, courtesy of Deutsche Bank's Gilles Moec is a far more nuanced analysis of what just happened, as well as a model looking at the future of the pro forma Spanish debt load with the now-priming ESM debt, which may very well hit 100% quite soon as we predicted earlier. Furthermore, since the following comprehensive walk-thru appeared in the DB literature on Friday, before the formal announcement, it is quite clear that none other than Deutsche Bank, whose "walk-thru" has been adhered to by the Spanish government and Europe to the dot, was instrumental in defining a "rescue" of Spain's banks, which had it contaged, would have impacted the biggest banking edifice in Europe by orders of magnitude: Deutsche Bank itself.

Phoenix Capital Research's picture

 

I believe this is Germany’s final push for EU control. If this fails and Germany ceases to offer additional bailout funds in some form then the EU will collapse (as noted earlier, the ECB, IMF, and US Fed cannot prop the EU up nor will the ESM mega bailout fund work). Spain’s literally on the verge of seeing a bank holiday. Germany is the only one who might have the funds to prop it up. And Germany wants gold. In plain terms, the EU will likely not last through the summer. It’s literally GAME OVER time. Various proposals will crop up (such as Germany’s “cash for Gold” program), but no one (not even Germany) actually has the funds to support the avalanche of banking failures that is coming.

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.

Friday Dump Complete: Moody's Warns Of Spanish Downgrade, Threatens AAA-Countries In Case Of Grexit

First we got Spain miraculously announcing late at night local time, but certainly after close of market US time, that the bailout so many algorithms had taken for granted in ramping stocks into the close may not be coming, because, picture this, Germany may have conditions when bailing the broke country's banks out, and Spain is just not cool with that, and now, after the close of FX and futures trading, we get Moody's giving us the warning the after Egan-Jones, S&P, and Fitch, it is now its turn to cut the Spanish A3 rating."As Spain moves closer to the need for direct external support from its European partners, the increased risk to the country's creditors may prompt further rating actions. The official estimates of recapitalising Spain's banking system have risen significantly and the country's indirect reliance on European Central Bank (ECB) funding via its banks has been growing. Moody's is assessing the implications of these increased pressures and will take any rating actions necessary to reflect the risk to Spanish government creditors. Moody's rating on Spain is currently A3 with a negative outlook." Moody's also warns, what everyone has known for about 2 years now, that Italy could be next: "However, Spain's banking problem is largely specific to the country and is not likely to be a major source of contagion to other euro area countries, except for Italy, which likewise has a growing funding reliance on the ECB through its banks." Of course none of this is unexpected. What will be, however, to the market, is when all 3 rating agencies have Spain at BBB+ or below, which as ZH first pointed out at the end of April will result in a 5% increase in repo haircuts on Spanish Government Bonds, resulting in yet another epic collateral squeeze for the country which already is forced to pledge Spiderman towels to the central bank. 

From RISK ON To REALITY ON

Perhaps some novel solution is found but this is not the muddling along kind of thing at all. This is the changing of charters kind of thing, the changing of national banking regulations kind of thing; the ceding of power to Europe kind of thing and anyone who thinks that this can all be accomplished in a matter of days is out having tea with Cinderella’ fairy godmother. Yet equities have rallied and bond spreads stopped widening on just this kind of hope but I predict that this will all be short-lived because, on its face, it is irrational. There is nothing wrong with having hopes and prayers but to base investment decisions on irrational interventions of some Divine power where there is not even a door for the Divinity to enter is just poor judgment by this name or any other you may concoct. It is no longer a case of “Risk on/Risk off” but of “Reality on/Reality off” and I advise you to keep pressing the “Reality on” button!

Cashin Conjures Thatcher's Prophetic 'Euro Folly' Call

The pending three-day rally that has seen European and US markets soar smacks of a short-covering squeeze, notes UBS' Art Cashin, as some of the biggest percentage gains came in the most heavily shorted stocks. While this is hardly surprising in this increasingly schizophrenic economy market, it is the long-term consistency and prophetic consternation of Margaret Thatcher's view of the Euro as "perhaps the greatest folly of the modern era" that sits uncomfortably with the Merkel comment-driven rally of this morning (for now).

Another Spanish Bailout Plan Taking Shape As Germany Folds

With all proposed Spanish bank bailout plans so far either shot down, or found to be inadequate, the question always has boiled down to whether Germany, which as we have noted in the past is the true lender of last resort in Europe, not the ECB, will agree to the trade off of preserving the Eurozone, i.e. temporarily ending the latest Spanish risk flare out, in exchange for the risk of political disgrace domestically, where more and more people are against sweeping European bail outs, due to soaring "contingent liabilities" which increasingly more people on the street are realizing are all too real (see: TARGET2). On the other hand, a direct bank bailout request for Spain using traditional European channels, which would fund the government, would result in a deterioration in the Spanish sovereign leverage, and make the country even riskier, thereby putting more pressure on the banks, and so in a toxic loop. It now seems that this dilemma may have been resolved, at least on paper. As Reuters reports, "A deal is in the works that would allow Spain to recapitalize its stricken banks with aid from its European partners but avoid the embarrassment of having to adopt new economic reforms imposed from the outside, German officials say. While Berlin remains firm in its rejection of Spain's calls for Europe's rescue funds to lend directly to its banks, the officials said that if Madrid put in a formal aid request, funds could flow without it submitting to the kind of strict reform program agreed for Greece, Portugal and Ireland."

Phoenix Capital Research's picture

 

I believe this is Germany’s final push for EU control. If this fails and Germany ceases to offer additional bailout funds in some form then the EU will collapse (as noted earlier, the ECB, IMF, and US Fed cannot prop the EU up nor will the ESM mega bailout fund work). Spain’s literally on the verge of seeing a bank holiday. Germany is the only one who might have the funds to prop it up. And Germany wants gold.

 

Europe Avoids Q1 Recession Thanks To Strong Exports And Weak Euro

When in doubt: crush your "common" currency by keeping your "partners" on the verge of bankruptcy, and export, export, export. After contracting by 0.3% in Q4 for both the Euroarea (of 17 countries) and the EU27, just released data from Eurostat indicated that in Q1, GDP for both "areas", but notably the Eurozone, was flat quarter over quarter courtesy of... strong exports. Which in turns shows just why various countries in the Eurozone (coughgermanycough), namely those who actually are relevant in the GDP calculation, seek to benefit greatly from the perception that Europe is on the brink, and the EUR is sliding as a result, further promoting exports, and thus, growth. As a result, because technically it avoided two consecutive quarters of contraction, the Eurozone has avoided the dreaded recession. For now. Expect further speculation that Europe is imploding, continuing to benefit solely the one export powerhouse of Europe: Germany.

Moody's Downgrades Six German Bank Groups, And Their Subsidiaries, By Up To Three Notches

First Moody's cut the most prominent Austrian banks, and now it is Germany's turn, if not that of the most undercapitalized German bank yet: "The ongoing rating review for Deutsche Bank AG and its subsidiaries will be concluded together with the reviews for other global firms with large capital markets operations." Punchline: "Frankfurt am Main, June 06, 2012 -- Moody's Investors Service has today taken various rating actions on seven German banks and their subsidiaries, as well as one German subsidiary of a foreign group. As a result, the long-term debt and deposit ratings for six groups and one German subsidiary of a foreign group have declined by one notch, while the ratings for one group were confirmed. Moody's also downgraded the long-term debt and deposit ratings for several subsidiaries of these groups, by up to three notches. At the same time, the short-term ratings for three groups as well as one German subsidiary of a foreign group have been downgraded by one notch, triggered by the long-term rating downgrades."

Goldman Previews ECB "Hope For Best, Prepare For Worst"

Germany remains vehemently opposed to any euro-wide deposit guarantee scheme as the head of the association of savings banks believes it: "would lead to a spreading of risks to the detriment of German financial institutions" and that this would "increase the burden for national protection schemes, which is not in the interest of German banking clients". Not exactly encouraging and along with the fact that Goldman notes that Germany's 'growth plan' (which includes increasing EIB capital and redirecting existing funds to the periphery) with which it will attempt to bolster its opposition to soaking up more peripheral risk, contains 'nothing really new in it'. For this reason Goldman is far less sanguine heading into the ECB meetings as they hope for the best and prepare for the worst. They expect Draghi's forward-looking statements on being ready to act, conditional on events in the periphery, will be the most important headlines but expect him to remain stoic in his position on governments contributing to the solution. Goldman's view remains that, at least for the time being, the ECB has to play a leading role in stabilising the system (though SMP remains marginalized given its potential to sit outside of the ECB mandate) given that it can operate more quickly and more effectively, given the many political constraints governments face. A genuine long-term solution, however, falls once again in the domain of governments.