Monday, 11 June 2012

So Spain needs a bail out after all

After the usual repeated denials of the inevitable Spain asks for a bail out of 100bn€. The markets have an initial bounce but there are however a number of unanswered questions and problems with this bail out and as with all the previous bailouts I expect it will rapidly unravel when the details are scrutinised


First, the obvious question, where does the money come from? Well the Brussels has not announced whether it will be the temporary EFSF, European Stability Facility, or its permanent replacement, the ESM , the European Stability Mechanism. Either way like IMF loans other Eurozone members will be tapped for the cash. Only Germany has spare cash and it will push indebted Italy further into the mire. Oh dear!


Worse if it is done via the ESM then that like IMF loans will be the first to be repaid in event of a default with existing commercial loans subordinate to ESM loans. Now would you want to buy ordinary Spanish bonds under these conditions? Obviously not. Spanish ordinary bond yields will rise and bond prices fall and it will be the same as a Greek haircut. Spain will be locked out of commercial capital markets and totally dependent on ECB and EU finance which means other Eurozone countries.


So the Eurozone will have a rising number of borrowers and a diminishing number of depositors. Its a bit like the UK benefits and tax system.


Politically its been rushed through before the coming Greek elections can cause further instability. This is typical EU unsmart thinking. The have handed a superb stick to those Greek parties that oppose their bail out with all its horrible austerity requirements to say me too. Ireland most of all will want the nrew austerity lite loan and quite right too!


The Spanish have been conned by their bankers as we were. Independent estimates of their bad property loans are in the rang 350bn to 450 bn€. So Don Juan will be back for more very soon.


In Spain its the poor that are paying for the rich bankers but without our generous social security system they will suffer much more. There are no jobs in Spain. You cannot sell a house or flat to cover your mortgage loan. Its melt down.


These mortgage bank, cajas in Spanish, should have been allowed to go bust but that would be the end for all the Spanish political elite's careers. We went through the same thing with our mortgage bank, Northern Rock. That should have been allowed to go bust. I had shares in NRock as did all its pensioners and employees but it would have been the best and cleanest solution. Death is not nice but its clean and inevitable. Attempts to avoid the inevitable end in disaster.


The least pain solution that keeps the Euro is for Germany to leave the Euro but it will end like Hitler at Stalingrad and Napoleon in Russia.



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