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 year, 5 year, 10 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.