Nomura: "Spain Will Need Full-Blown Bailout"

While hardly saying anything new, more and more pundits are waking up to the reality that faced with an environment of epic capital outflows predicated by a complete loss in the system (see Greece), Spain simply can not survive. We wrote about the record outflow in Spanish deposits last week (here and here) and the fact that with banks urgently seeking to plug liquidity holes, coupled with soaring NPL levels, in the absence of actual profits they are forced to sell all those SPG bonds they had been purchasing during the open ponzi phase, where ECB funding would be recycled by local banks to meet primary market demand. Overnight even the New York Times has finally understood this simple identity: record outflows = the end. And now, the banks begin to chime in, pointing out what is patently obvious: from Nomura - "Spain will need full-blown bailout which will include more active role of ECB in Spanish bond markets."

More from Bloomberg:

  • Capital flight from Spain is in a "category of its own," with extreme, broad-based outflows raising “serious concerns about the implications for banking sector stability and economic growth,” Nomura strategists Jens Nordvig and Charles St.-Arnaud write in client note.
  • Capital outflows on 3-month rolling basis at 50% of GDP vs Italy 15%; for comparison, Indonesia outflow during Asian crisis peaked at 23%
  • Foreign selling of Spanish securities in 2Q equal to 19.4% of GDP; also liquidate Spanish bank claims at 15.3% of GDP in 2Q
  • Spanish residents shift funds to foreign banks at rate of 16.7% of GDP in 2Q
  • Spain fills capital gap through Target 2 borrowing, currently at €408 bln or 39% of GDP;
  • Overall capital flight from euro zone vs rest of world "normalized to some degree" after earlier outflows: SNB intervention in July at €35 bln, about half of May and June; TIC data for June show US investors net buyers of euro zone bonds, euro zone residents modest sellers of US Treasuries

And picking up on what we wrote last night, namely that Spain is running out cash, here comes Daiwa doubling down on Nomura's conclusion:

  • Spain using treasury debt to recapitalize Bankia pushes Spain toward requesting full sovereign bailout, Daiwa Capital Markets credit analyst Michael Symonds says in an interview.
  • The use of treasury debt is “designed with Spain’s tight liquidity position in mind,” allowing Spain to avoid drawing on its “dwindling” cash reserves
  • Govt needs cash to maintain deficit spending and to pay out ~€20b bond redemption in October

In other words, just what you read here first last night.

Finally, this is how the Spanish endgame looks visually.