European Contagion Turns Into Domino

[Raúl Ilargi Meijer]

One day after the EU finally sanctioned the €100 billion bailout for Spain's banking system, for which the sovereign will remain on the hook,
[See the full post at: European Contagion Turns Into Domino]

[Nassim]

Please change the million to billion – soon trillion 🙂

[John Day]

Nice work, Ilargi. this is exactly the kind of European update/summary I was looking for, and it is an excellent follow-on to Stoneleigh’s essay. I might add that Charles Hugh Smith has an excellent essay up today about deflation being just lovely, if you are holding a lot of asset-backed debt. (I think Stoneleigh’s mention of “conflict” is important. Financial elites need the “conflict” to remain controlled, more like WW-1 and WW-2 than the French Revolution, for instance.
https://www.oftwominds.com/blogjuly12/deflation7-12.html

[davefairtex]

I agree the whole picture seems to be brought into clearer focus now. A domino is poised to fall.

The Spanish 10 year bond yields breaking to new highs (7.25%), Santander and the euro dropping to new lows says the market confidence in all of these “solutions” is slowly ebbing away. People’s confidence is also dropping; what a picture, declaring new austerity at the exact same time 100B euros will be given to the bankers. (GDP equivalence-wise, that’s 1.5T dollars; twice the size of the US TARP!)

Just to make it through 2012, Spanish government will need from 50-75 billion – the specific amounts depend on the actual deficit from the central government and the regions. Spain has already issued enough bonds this year to cover redemptions (about 50B euros), so the size of the deficit for this year entirely drives remaining auctions. That’s probably why Rajoy is so enthusiastic about getting rid of it.

If this was just about funding the government deficit, a 6-month can kicking exercise wouldn’t be so expensive (35-50B). But then we add on the costs of the bank restructurings (currently 100B, sure to rise), and regional deficits and refundings (25-40B). They’ve raised 52B in the past six months – do we imagine Spain can raise 200B in the next 6 months?

This seems unlikely.

And costs are probably 125B per year after that, assuming 50B in refundings and 70B in deficits. And that assumes bank restructuring only costs 100B, which I think is off by a factor of 2 or 3.

I’m not sure Spanish debt restructuring fixes anything if they stay within the eurozone. They are still in primary deficit, and after a restructuring nobody will lend them a dime, and so they end up like Greece (and Illinois) – they just stop paying their bills, and that just spirals the economy down in an even bigger hurry.

I’m sure Germany doesn’t want to sign up for 200B + 125B per year. And the ECB likely already has enough Spanish debt. So the answer is?

Leave the eurozone, the regions and the central government default on everything, restructure the banks Sweden-style, and print to cover the deficit and the bank restructuring. Yet I don’t think europe is quite ready for that outcome – it would almost assuredly lead directly to a eurozone banking crisis from Spanish sovereign debt losses.

If they put off the bank restructuring, the price tag is maybe 20-30 billion euros to keep things going for 2-3 more months. Any bets on them selecting the cheap can-kicking option vs a eurozone-wide banking crisis?

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