Ireland

If Greece, Ireland, Portugal and Spain can do it, why not everyone? Heck, why pay for anything, instead of just ramping up debts, until the consolidated debt load is so high the Fed has no choice but to bail everyone out? Of course, this is purely a thought experiment (for now... there are still 5 months in the presidential race). Still, we were curious to see if there is validation of this meme "out there" - and to do this we of course went straight to the source - Google's most recent addition in tracking public queries, Insights for Search, and looked up the term "bailout." We were not at all surprised to find the English-speaking world's curiosity in this particular synonym for a 'free lunch' (with other people's money) has exploded in the last few weeks.

The upcoming bailout in Cyprus has warts, and spies.

The situation in Europe goes from bad to worse. Gluskin Sheff's David Rosenberg is back to his bearish roots as he remind us that 'throwing more debt after bad debts ends up meaning more debt'. As he notes, the definition of insanity is (via Bloomberg TV):

When you realize that of the potential $100 billion to spend, 22% of that has to be provided by Italy and their lending to Spain is at 3% but Italy has to borrow at 6%. They have to lend to Spain $22bn at 3% - it is just madness. Everybody is getting worried again. The solution that they seem to have come up with seems to be worse than the problem in the first place.

What are capital controls? Simply, capital controls are policies which restrict the free flow of capital into, out of, through, and within a nation’s borders. They can take a variety of forms, including:

• Setting a fixed amount for bank withdrawals, or suspending them altogether
• Forcing citizens or banks to hold government debt
• Curtailing or suspending international bank transfers
• Curtailing or suspending foreign exchange transactions
• Criminalizing the purchase and ownership of precious metals
• Fixing an official exchange rate and criminalizing market-based transactions

Establishing capital controls is one of the worst forms of theft that a government can impose. It traps people’s hard earned savings and their future income within a nation’s borders. This trapped pool of capital allows the government to transfer wealth from the people to their own coffers through excessive taxation or rampant inflation… both of which soon follow.

...and after all of those fancy acronoyms (ECB, EFSF, EU, ESM, ASS, BS, etc.), Italy is essentially just one big Greece. No, I'm not oversimplifying, just look at the bank bailout bailing out the insolvent country circular arguments!

With the Italian 10 year at a 6.15% and the Spanish 10 year at a 6.60% this morning; pause. My recommendation is to be out of all European sovereign and bank debt but if you have to own some because of your mandate or because you are attached to some Index then it is time to stop, look and listen. The Red Queen (Angela Merkel) and her minions are playing “off with their head” games and the situation is not a joke. The EFSF loans are going to be replaced by ESM money when the fund comes into existence and this means that your position as a senior bond holder will be subordinated to the IMF and/or the ESM. Any country including the existing troubled nations (Greece, Ireland, Portugal, Spain and shortly Cyprus) are going to have their debt replaced by the capital of the ESM so if you own any of these sovereign credits or any of their banks then you are going to be placed in a junior position by fiat. Then we have just seen what happens with “local law” bonds as demonstrated by Greece so that you need to swap out of any “local law” bonds ASAP and only own bonds governed by American, British or Swiss law. This would be for any and all nations on the Continent without exception. When it comes to bond holders versus taxpayers the taxpayer will always win so you must protect yourselves now rather than having your head handed to you later. There is no joy in finding your head on some silver platter I assure you and you must make the changes now and not later. I cannot stress this enough and I hope you are paying attention!

As Many Have Predicted for Years

Greece gets it. Now Ireland gets it. Spain just got it. And now Cyprus is getting it. The 'it' being the desperate need by the core to hold the 'status quo' together implies much more strategic negotiating power for the periphery than anyone would want investors to know. As Greece's Syriza leader Alexis Tsipras has been saying from before the Greek election, this is a pan-European problem and renegotiating part or all of the bailout terms is far more open. As Bloomberg reports this morning, Cyprus' FinMin Vassis Chiarly said the nation should not be 'demonized' if it takes the choice of a bailout:

*SHIARLY: CYPRUS HASN'T RULED OUT EU BAILOUT OR THIRD PARTY LOAN

Confirming the constant ability of Europe's nation to state the obvious and understate the reality, Shiearly added, "the situation isn't as bas as presented by some" and do not wory Cypriots as 'it would be able to secure positive terms if it resorted to a bailout'.

On Saturday, when we discussed the impact of the Spanish bailout for other European countries, focusing on Ireland which had promptly requested a renegotiation of its own terms to match those of Spain, we noted that "Syriza's Tsipras should send a bottle of the finest champagne to de Guindos - he just won him the election." It appears that the leader of the Greek anti-bailout party wasted no time to capitalize precisely on just this.

Spain marks the fourth bailout during this Euro Zone debt crisis saga, after Ireland, Portugal and Greece, and may need more aid, while Italy is looking good to be the fifth bailout candidate

With that in mind, I sincerely doubt €100 billion is going to solve Spain’s problems. The whole bailout reeks of desperation. And it likely will have political and financial implications that will quickly render the benefits of this move moot. Of course, when you’re facing systemic collapse, you don’t have time to debate implications and consequences. But I highly doubt that this move will do much to address Spain’s true problems.

European equities in both the futures and the cash markets are making significant gains after a mornings’ trade, with financials, particularly in the periphery, leading the way higher following the weekend reports of the Eurogroup confirming aid for the Spanish banking sector. With data remaining light throughout the day, its likely investors will remain focused on the macro-picture, seeing some relief as the Spanish financials look to be recapitalized. At the open, risk sentiment was clear, with EUR/USD opening in the mid-1.2600’s, and peripheral government bond yield spreads against the German bund significantly tighter. In the past few hours, these positions have unwound somewhat, with EUR/USD breaking comfortably back below 1.2600 and the Spanish 10-yr yield spread moving through unchanged and on a widening trend across the last hour or so against its German counterpart, and the yield failing to break below the 6% mark.

For those of you that keep waiting for some giant change-the-world event; I invite you to re-gear your perspective. Greece has fallen, Portugal has fallen, Ireland has fallen and now Spain has followed the road into Purgatory. These are significant events that are, in fact, changing the world though none has caused Armageddon to date though they may by their aggregate but not singular importance. This is also why Greece is of such key importance; it has nothing to do with staying in or out of the Euro or of the preservation of the European Union as a political entity. That part of the equation is barely relevant. What is of critical importance though is that if they leave the Euro that they will default on some $1.3 trillion in total debt that can be afforded by no one. That is the rub and you may ignore the rest of the Eurospeak that is bandied about from Brussels to Berlin. A default by Greece will bankrupt and cause re-capitalization at the European Central Bank, it will throw the IMF into a tailspin and it will play havoc with Target2 and the German Central Bank. Do not allow yourself to be taken in and mis-directed; this is THE issue and the only issue of real importance.

And another bank does a book report on our Saturday post explaining the Spanish bank bail out. At this point, it should be all too clear how Spain's only solution to being in a very deep hole is to keep on digging.

The past week was dominated by the Eurogroup statement over the weekend that Spain will seek financial support for its banks. According to the statement, Spain intends to make a formal request soon, with financial assistance expected to be around EUR100 bn and to come from the EFSF or ESM. Aid will be channeled through the FROB, and will increase the debt burden of the Spanish sovereign. There will be no macro or fiscal conditionality as in the bailouts of Greece, Ireland and Portugal, but only on bank sector restructuring. That said, there will be monitoring of the deficit and structural reforms as part of this bailout, though no conditionality, and the IMF is also invited to monitor progress under the program. Separately, the week also saw lots of commentary out of the Fed, including from Chairman Bernanke and Vice Chair Yellen. Looking to the week ahead, the key question for us is where to harvest excessive risk premia, bearing in mind that the Greek elections are around the corner.. In terms of policy talk and data, for the former Fed chatter ends on Tuesday when the blackout period begins ahead of the FOMC on June 19/20. For the latter, US retail sales and industrial production will be important to watch as we head into the FOMC next week.