Spain’s Rescate (“Rescue”)

June 9, 2012

Spain’s bank rescue news is out,  and the obfuscation is very high, as usual. The rescate (rescue) amount offered is 100 bn euros, a mere two and a half times last week’s estimate.  This tells us the Spanish banks are under-capitalized by at least 100 bn euros. That’s positive? We already knew the ESFS and ESM would lend Spain money, the question is in what manner?   This uses up about all the capacity Europe has on it’s own.  This opens up more cans of worms. Let’s go through them.

-Realize that once Spain takes the money, then their obligation in the EFSF and ESM bail out mechanisms would be taken over by others.   Those “others” are Italy, whose share rises from 19pc to 22pc.  France’s share rises from 22pc to 25pc, and Germany’s from 29pc to 33pc. The smaller core countries like the Netherlands, Belgium, etc will pick up a little more as well.  By piling more on Italy, and Belgium, the credibility of the guarantees given to EFSF bonds would collapse.

- That’s why I think the American clown posse was out in force last week hinting at involvement to placate Germany (and Italy and France).  This may not be revealed upfront at first, because it is now necessary to go back to Germany, and have them object to the unconditional rescate.  Already Finland is demanding collateral if Spanish aid is through EFSF, and good collateral is in short supply, especially when Moody downgrades Spain to BBB.   In response the IMF and US in particular will get involved. It could even take the form of a unilateral US participation without needing the harder sale involved bringing in the IMF.

-  Apparently the IMF will supervise the “rescue plan”,  in an advisory role, with focus on the banking system.  That is strange given that IMF advocates bail ins (bondholders and equity holders take the hit).  Really going to be impossible to sell this to Germany without broader international involvement.  US-Spain ties have historically been strong and I think when the fog lifts, the US will be involved backing this rescate (and further rescates) with money.   If so, this very well could mark the end of the US phony safe haven house of mirrors, and impact both the USD and Treasury market.  The commercials have lined up big shorts of Treasuries ( 2 year5 year10 year, and 30 year),  and are long Swiss Francs and Euros. Now we may know why.

-This sets up an enormous Euro short squeeze. The boyz are so off side, that this one could take some down. Somebody important is going to gush blood. That is why I have been long a good size position in Swiss Francs in the forex market. From an actionable perspective I could see a euro rally up to 1.28-1.29 convergence overhead.

Source: Sober Look, Euro positioning.

-Spain is saying that it is ‘agreeing’ to a bailout without conditions and only after the bank audit has been completed June 20- in other words sometime after the Greek election.

- Should be a boost to the mutually assured depression tactics (MADT) of the anti-austerity partidos in Greece (and elsewhere).  It would be logical that political partidos in Ireland, and Portugal also adopt MADT. In fact Italy should too, because of the new burdens that have been piled on.



4 Responses to Spain’s Rescate (“Rescue”)

  1. Russ Winter on June 9, 2012 at 9:17 pm

    Now Ireland wants to renegotiate deal to match Spain’s. So much for the 10th circle of hell theory of not cooperating.

  2. Russ Winter on June 9, 2012 at 9:23 pm

    Steve Keene, Australian debt jubilee economist:

    [The banks] have to suffer and suffer badly. They will have to suffer in such a way that in a decade they will be scared in order to never behave in this way again. You have to reduce the financial sector to about one third of its current size and we have to also ultimately set up financial institutions and financial instruments in such a way that it is no longer desirable from a public point of view to borrow and gamble in rising assets processes.

    The real mistake we made was to let this gambling happen as it has so many times in the past, however, we let it go on for far longer than we have ever let it go on for before. Therefore, we have a far greater financial parasite and a far greater crisis.

  3. Joe on June 10, 2012 at 9:33 am

    It will be hard to impossible for Greece and Ireland to renegotiate their bailouts because the IMF is involved. Spain has not yet involved the IMF.

    How does the enormous short squeeze occur? 100B euros meeting their demised paying spanish debt does not seem enough.


  4. solohedger on June 10, 2012 at 12:11 pm

    The Swiss are find all sorts of attractive places to spend their zero-cost fiat these days. Count Russ’ portfolio among those places!

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