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Espana en Fuego

Interest-Rates / Eurozone Debt Crisis May 29, 2012 - 12:33 PM GMT

By: Ashvin_Pandurangi


Best Financial Markets Analysis ArticleWhat's really left to say about Spain, anymore? This 12th largest economy in the world now finds itself as close to financial meltdown as a country (other than Greece) can get, and it has gotten there by taking the most twisted and shady path that it could find. Ilargi wrote about this shadiness back on April 18 in his article, Spain, Land of Magical Financial Realism. In it, he discussed how the bank bailout fund in Spain was being funded by... the Spanish banks themselves, so as to allow the Spanish government to under-state its actual deficit/GDP ratio. Most of that "money", in turn, came from the ECB LTRO Part Dos, which gave out billions worth of 3-year loans to these banks and, in exchange, encumbered just about ALL of the (already toxic) collateral available in the Spanish banking system.

Oh lordy. The Spanish sovereign is being propped up by its own defunct banks. Which get the money to do the propping up from the ECB (re: Germany). That’ll go over well in Berlin once it's fully understood.

Bank saves sovereign saves bank saves sovereign. Bank saves sovereign with ECB money, and sovereigns rescue their lenders with funds borrowed from the European Union. The Spanish zombie stalks the Madrid and Barcelona midnight streets bleeding German euro's. Magical realism at its best.

One more thing: most of what I see floating by in the news when it comes to Spain's real estate talks about the cajas, the small banks. But I don't believe for a moment that the big banks, like Santander and BBvA, were not involved in creating that behemoth bubble. Well over 10% of Spanish homes are reported to be empty. The country built more homes prior to the crisis than Germany, France and Britain did combined.

Santander then went on to acquire Alliance & Leicester, Bradford & Bingley and Abbey’s in Britain, as well as Sovereign Bancorp in the US and many other banks internationally. So I wonder sometimes if perhaps anyone in those countries ever asks themselves how safe those operations are today. If these guys can transfer overvalued bad loans and securities around between their Spanish affiliations, can they also do the same in their international branches?


It should have been clear that all of this blatantly circular credit creation wouldn't do a damn thing to ease the underlying solvency issues in Spain's banks, and would perhaps only make those problems much worse. Sure enough, it only took about a month from Ilargi's article until Bankia went down in flames and the financial situation for Spain became exponentially worse. In a commentary from April 11, Spain WILL Need a Bailout Soon, I shot down Mariana Rajoy's (Spanish PM) hard-headed assertions that Spain will not need an EU bailout:

If the recent history of the unfolding Eurozone crisis is instructive, Spanish PM Mariano Rajoy's unconditional statement today that his country will not need an EU bailout signifies that a bailout is exactly what it will need before the year is up. This fact is obvious to anyone who has the slightest idea of how bad Spain's economy is right now, with an extremely weak housing/banking sector and unemployment that is upwards of 23% and rising. It is, of course, always the banks that get the lion's share of any bailout money, and Spain's banks are falling apart quickly.

Part of the problem for the Spanish banks now, in addition to their extensive exposure to troubled sovereign bonds and mortgage-related assets, is the fact that the EU's prior "rescue" efforts have only made things much worse for the entire Eurozone periphery in the short, medium and long-term. As referenced here many times, the ECB's LTRO programs have simply propped up the banks temporarily, while draining the peripheral economies of available credit and hastening the flight of private (now subordinated) investors from their troubled banking sectors. What else would one expect when trying to solve a debt problem by piling on more layers of unproductive debt?

Earlier this month, I had also pointed out that, while Rajoy was claiming his country would never need a bailout, he was also telling the Parliament that Spanish households, businesses and regional governments had been effectively shut out of the private credit markets, which would include, of course, the Spanish banks themselves (Spain Has Been Shut Out). And THAT would include, by implication, the Spanish Treasury. I made it clear that Bankia's downfall would not bode well for the finances of the Spanish government:

Without the pillars of austerity and "structural adjustment", there is very little justification for the ECB or Germany to continue backstopping the peripheral finances of the Eurozone. It's not as if the consumers or businesses in these countries can even afford to buy Germany's exports anymore, as made all too clear by Rajoy's comments, and the failure of peripheral banks is all but guaranteed. When a financial institution such as Bankia is bailed out, make no mistake - there will be no one able or willing to bail out the Spanish Treasury

Sure enough, Bankia was immediately nationalized by the Spanish government and, after the phony accounting and the REAL losses were gradually revealed to the public, it has proven itself to be the largest bank failure in Spanish history, and could easily become worse after more accounting falsifications are  brought to light (but none of that criminal activity is stopping one of Bankia's directors from leaving the firm with a €13.8 million termination package). It wasn't long before Rajoy was clamoring for the Eurozone Stability Mechanism (ESM) to "lend" directly European (Spanish) banks as well as the ECB to resume purchases of Spanish sovereign debt, in direct contradiction to his earlier "no bailout" proclamations.

The man has lost all credibility, as reported by Louise Armitstead and Fiona Govan for the Telegraph:

Mariano Rajoy says Spain is 'finding it very difficult to finance itself' but insists there will be no bail-outs

At a press conference designed to reassure markets after the €19bn nationalisation of Bankia, the prime minister admitted that Spain was “finding it very difficult to finance itself”.

But Mr Rajoy blamed the soaring borrowing costs on advancing debt crisis across the eurozone, and tried to dismiss fears that Madrid will be crushed by the debts of its banks.

Shares in Bankia, which were suspended on Friday as the government unveiled its largest ever recapitalisation plan, plunged 27pc before recovering.

The Spanish newspaper, El Mundo fanned the fear by claiming that a further €30bn was required to rescue four other banks, CatalunyaCaixa, Novagalicia, Banco de Valencia.

Officials claimed Madrid was already working on complex plans to use the European Central Bank to help recapitalise Bankia, but Mr Rajoy said Spain would stand by its banks by itself. “There will be no rescue of Spanish banks,” he said.

He said he wanted the bail-out fund, the European Stability Mechanism, to be allowed to lend directly to banks - but argued this would be for the sake of banks across the eurozone, not just Spain. “The [Spanish] government is doing what it should be doing,” said Mr Rajoy, who rarely speaks publicly on the debt crisis. “Europe must dissipate any doubts over the euro, affirm that the euro is an irreversible project and act in consequence.”

Spain’s Ibex fell 2.17pc, dragging other bourses down, although trading was low due to US and European holidays. The yield on Spain’s benchmark 10 year bonds plunged deeper into the danger zone, rising to 6.48pc. The spread between German and Spanish debt yields to the widest spread since the euro was launched.

“Spain is finding it very difficult to finance itself with sovereign debt risk premium so high,” said Mr Rajoy. “With [the spread over bunds] reaching 500 basis points it is very difficult to raise finances.”

Nicholas Spiro, at Spiro Sovereign Strategy: “The Spanish crisis has reached a tipping point. Investors have lost confidence in Spain. The botched bail-out of Bankia was the trigger for the abrupt sell-off - a sell-off that threatens to turn into a rout unless bold and decisive measures are swiftly taken by eurozone policymakers to shore up the bloc’s endangered sovereigns and their banks.”

So Rajoy definitely has good reason to be concerned - Spanish 10Y bond yields are hovering around an entirely unsustainable 6.5% and are at a 500bp+ spread from German 10Y debt, while Spanish government liabilities to its banking sector are only going up. It is predictable, yet extremely saddening and maddening that the mainstream always focuses on how best to bailout the large banks, while the people are left to suffer under mountains of private and public debt (Spain's Unbearable Pain). Spain's unemployment rate is at 25% and rising, while retail sales just posted a record-breaking year-over-year decline in April (9.8%), which makes it all too clear that many Spanish people don't even have a penny left to spend.

These people are losing their jobs, savings, homes, investments, families and their will to live with every passing day. Perhaps "losing" isn't the right word, because it's not as if they just misplaced all of these things. Instead, these things have been forecefully stripped from the people, who are LOSING their patience for financial oppression. It is times like these when you root for the system to quickly collapse into a heap of rubble through mass protest and unstoppable financial contagion, because the alternative is to watch it burn down slowly by the filthy hands of the corporate elites, as the smoke suffocates the life out of everyone else who is trapped within it.

Ashvin Pandurangi, third year law student at George Mason University
Website: (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2012 Copyright Ashvin Pandurangi to - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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