Over the edge

I think the EUnion just blew itself up. Or rather, I think ‘the colleagues’ have steered the EUnion over the egde, into the abyss: Spain bows to €100bn bank bailout.

Spain paved the way for a €100bn (£81bn) bail-out of its stricken banking sector on Saturday night as European leaders moved to bring a halt to the continued economic malaise hurting the eurozone.

And if you’re wondering why I think the EUnion has doomed itself, read this analysis on ZeroHedge: The Main Outstanding Items Following The Spanish Bailout.

De Guindos, Schauble and the Eurogroup, all announced that the sole source of cash would be the ESM and/or the EFSF. The problem with this is that the ESM has yet to be ratified by Germany, whose parliament said previously it is sternly against allowing the ESM to fund a direct bank bailout, something which just happened. Thus, the successful German ESM ratification vote, whenever it comes, and which previously was taken for granted, now appears to be far more questionable.

Which leaves the EFSF. The problem with the EFSF is that there is about €200 billion in dry powder. And this includes the Spanish quota of €93 billion, which we can only assume is now officially scrapped.

The money for Spain is in the form of a loan (much like Greece) which means this bail-out will increase Spain’s sovereign debt by a cool 100 billion. ‘But wasn’t debt the problem in the first place?’, you may ask. To which I would say ‘Yes!’ and sit back and watch as the ridiculousness of the EUnion sinks in.

ZeroHedge sees a bank suicide pact in the making:

Naturally with Spain now officially biting the bullet, the only question remaining is: when is Italy going to drop next.

And ironically, what just happened, is that the Eurozone, with the tacit agreement of Germany, essentially gave insolvent banks a green light to short themselves into a full bailout.

How long until Italian banks get the hint, and proceed to short each other, or themselves, either with shares of stock or , better yet, through CDS which unlike in the sovereign case, can be held without an offsetting cash basis position. In other words: is it time for the Italian bank suicide trade?

ZeroHedge expects the markets to react negatively in the longer run. Holders of Spanish sovereign debt are now facing a future similar to that of colleagues holding Greek debt papers. The latter are now holding assets that are worth less then 10 cents for every euro of value at issue.

This prospect will mean that holders of Spanish debt paper will want to get rid of it, like, yesterday. Come next week Spain may find itself incapable of refinancing existing debt. And that, dear reader, spells eventual default.

This latest confirmation that the EUnion is a sinking ship, ZeroHedge writes, has been predicted by many for years. As such, the European risk markets will continue sinking, and capital flows will continue rushing to Germany.

Thus we find, that giving in to Spain, just so as to keep the dream that was the single currency alive a little longer, will have made things worse. In fact, the end of the euro may now very well be inevitable. And with it the end of the EUnion.

Whatever else may be heading our way (And there would be a lot, most of it not very pleasant), that at least is something to look forward to with a little joy.

(photo credit)

[UPDATE001] From the ‘surprising if they didn’t’ file: Ireland wants rescue deal negotiated to match Spain’s.

Ireland wants to renegotiate its rescue plan to benefit from the same treatment as Spain, which looks set to win a bailout for its banks without any broader economic reforms in return.

Did the Troika shoot itself in the foot in Spain?

[UPDATE002] The Wall Street Examiner:

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.

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One Response to Over the edge

  1. DP111 says:

    I’m confused. Are these bail out moneys loans or outright gifts?

    The impression I get is that they are loans. If they really are loans, then it only compound the debt problem. If however, there is an understanding among the political rats, that they are only called “loans” so as not to upset Germans, but in reality need not be paid back, then this only adds to the stink, and later payback.

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