And now the contagion begins in earnest, as the Spanish bail out their savings banks…
50 to 60 billion euros are needed (a cynic would say that means it’s probably over 100 billion), and it’s unclear where Spain intends to get the money. The private markets aren’t interested in buying up the cajas, and it remains to be seen whether international markets will continue to finance Spain.
Gorilla says: “Hello Frankfurt, time to wake up and smell another bailout!”
Or perhaps electricity is what you seek, come to Spain and Ireland for a really good deal!
Magically, the ECB hopes that the confidence fairies will return once enough lousy bonds are bought and/or more credit is extended to member states that have no chance whatever of paying their debts in full.
What’s being ignored are two things: 1) the PIIGS can’t finance their debts when their economies are bust and 2) the non-PIIGS banks are already bust.
Gorilla says: “It’s not the Merkel put, it’s the Trichet cliche!”
Spain’s local government units are gradually going bust, thanks to the property boom collapse and the austerity measures recently announced in Madrid.
And Spain apparently can’t really pay off its bonds and reduce budget deficits by 2012. Unemployment’s above 20%, and Spanish banks need fresh capital to the tune of 50-90 billion Euros. The outlook is for years, if not decades, of crippling deflation, social unrest and mass unemployment.
Haircuts for bondholders on the order of 30% (and you just know the haircuts actually being contemplated are far larger) would reduce Spain’s GDP by 40% and Eurozone GDP by 15%.
The stress tests currently being performed do not take into account the possibility of defaults, so the true picture of Euroland insolvency has yet to be painted.
Gorilla says: “Time for Spain to take a siesta from the Euro!”
Spain wins the World Cup, now its millionaire soccer heroes will return home to a land of 20% unemployment, idiotic fiscal austerity, and a decade or more of crippling deflation…
Still, a nation can feel proud of something!
Gorilla says: “Or recognize that sporting achievement covers up a trophy room of non-achievement!”
Another day, another Spanish bank goes to the wall!
It’s becoming clear that the bank debts in Spain, nearly $500 billion, are threatening the economic viability of the country.
What’s needed is what’s still not on offer from Brussels: an orderly exit from the Euro, accompanied by haircuts to creditors and a devaluation on the order of 40%.
It’s not a magical solution, because it will cause real pain in Spain and the other PIIGS, but at the moment magical thinking is all that’s going on in France and Germany.
Gorilla says: “Time to underweight a new peseta!”
Angela Merkel is desperate to save the Euro!
Greece is one problem, but Portugal and especially Spain are much bigger problems. The spreads on Iberian debt relative to German bunds are at or approaching post-EMU highs.
Beyond crushing fiscal austerity at a time of puny global economic growth, what’s really needed is a recognition that either the so-called peripheral states or Germany itself must exit the euro.
Chancellor Merkel at last appears to understand what’s at stake, but she’s not yet willing to accept that Euroland must become smaller and allow devaluation by the most troubled, soon-to-be non-Euroland countries.
The alternative is large scale default, followed by the collapse of the European banking system.
Gorilla says: “What spreads even faster than swine flu? The contagion of German complacency!”
Austerity is promised, but loans are ponied up…
Spain and Portugal are next, there’s little doubt about that now!
Gorilla thinks: “I guess they call it the PIIGS in clover society!”
You can almost hear the pips pop (or the Bavarians’ hops pop) as Euroland says it will help out the Greeks.
Short covering has begun, but remember that Greece is a tiny economy; the problems in Spain are much bigger.
And the Germans may well want to encourage a bit of currency decline to help their own flagging export economy and undercapitalized banks.
Gorilla says: “A bushel and a peck and a Euro, what the heck!”
Gorilla’s Blog