As if holding $36 billion (€25 billion) in Spanish sovereign debt wasn't enough, China now appears to be going all in as Spain's white knight. Reuters reports that in addition to keep the government solvent, China is now going direct to Spain's troubled banking system. "Chinese investors including the country's
sovereign wealth fund may inject $13 billion into Spanish banks, a
government source said on Wednesday after Spain's premier met financial
authorities in Beijing." Then again, recall that it was Portugal which relied last exclusively on China as a last chance rescuer. Which is why we disagree completely with this statement: ""If this is true it is positive for the market. If CITIC or another Chinese vehicle invests 9 billion euros that would represent around 5 percent of the equity in the Spanish banking system," said a London-based analyst who asked not to be named." Uh, no. It means that the market, like a good Pavlovian dog, will now start dumping Spanish paper in expectations of yet another bailout. And the more Spain is forced to buy to preserve it cross-linked investments in the PIIGS, the more dumping. After all such is life in centrally planned bizarro world.
There was no immediate comment from Beijing and it was not clear what terms would make the risk attractive to China, which has invested cautiously in overseas financial markets in the last couple of years partly to avoid any criticism it is squandering reserves.
Concerns about delays in recapitalising Spain's ailing savings banks -- heavily exposed to bad loans from a burst property bubble -- have overshadowed the euro zone state's efforts to convince markets it will not need a bailout.
According to official estimates the savings banks -- which are known as cajas and hold about half the deposits in Spain's financial system -- need about 15 billion euros in fresh funding to meet strict new financial targets.
But private estimates go eight times higher than that when taking into account future losses from real estate writedowns.
How does China plan on throwing good money after bad?
Speaking by telephone from Beijing, the Spanish government source told Reuters that Chinese sovereign wealth fund China Investment Corporation was studying an investment of $9 billion, and that private entities might add an additional $4 billion.
China is looking at two possible investment structures, either investing directly in specific cajas, or savings banks, or creating a general fund that the cajas would be able to tap, another Spanish government source told Reuters in Beijing.
What is more troubling is that Spain now needs the implicit bail out by the ECB, China, and let's not forget, petrodollars:
Spain's borrowing costs have soared in the past year and a half due to concerns about its large deficit, but some confidence has returned as Zapatero has cut spending and pursued the consolidation and recapitalisation of the savings banks.
But while Qatar and United Arab Emirates sovereign wealth funds intend to invest 450 million euros in the cajas, private investors who have looked at the books say they will only invest at a steep discount, due to doubts about the scale of overall losses.
So the only question is whose taxpayers end up footing the bill. Alas, we are confident that once the IMF gets involved in the Spanish bailout some time in September, the answer will be, as always, America's.