First off, last weekend’s 100 billion euro Spanish bailout has staved off the inevitable for now.
What most people don’t realize, though, is that it actually spells disaster for the euro – there simply isn’t enough liquidity in the system and never has been. 100 billion euros is chump change.
A trillion euros is more like it. Probably more, to be quite candid.
Let me lay out the math that European politicians, whose skill set apparently consists of saying “present,” rather than developing real solutions, can’t be bothered to do.
According to the latest data, the European Stability Mechanism (ESM) and the European Financial Stability Fund (EFSF) have a combined lending capacity of 700 billion euros. If Spain requests the full 100 billion euros it approved last Saturday, this leaves 386.7 billion euros in excess capacity. The EFSF has already committed 213.3 billion euros. (700b euros minus 213.3b euros minus 100b euros equals 386.7 billion euros).
If you’re doing this math in your head, you’ll quickly realize that’s 233 billion euros more than the total bailout mechanisms now in existence.
Oops.
How Would a Spanish Bailout Be Any Different?
Call me crazy, but under the circumstances I don’t understand how European leaders can pursue the same course of sorry-assed lending in the Spanish bailout that they did in Greece and expect different results. It’s simply irrational.
Don’t get me wrong, I understand why they are trying to pull the wool over everyone’s eyes. But in reality, who’s kidding who?!
The markets know the politicos can do nothing to stem the tide of money flowing out of Spain’s economy any more than they could stop money from leaving Ireland, Italy and Greece.
The only practical consideration is preventing an all-out bank run through the front door – never mind that it’s already well underway out the back door.
Frankly, I think they’ve failed on both counts. Deposits in German banks are up 4.4% year over year to 2.17 trillion euros as of April 30th, while deposits in Greece, Ireland and Spain fell 6.5% over the same time frame.
Swiss bank sight deposits have reached five-month highs of 252 billion francs as of June 1, according to the Swiss National Bank. CNBC is reporting that up to 800 million euros ($1 billion) a day is being pulled out of Greek banks alone. Data from Spanish banks related to withdrawals is being closely guarded, but I can’t imagine it’s that much different.
No wonder the world’s traders recognize the Spailout for what it is – a colossal mistake.
Why the Bailout in Spain is Insane
I’d tell you what I think, but the legendary Jim Rogers put it so succinctly I don’t believe I can do any better. Speaking in an interview on CNBC recently, Rogers noted that the Spanish bailout is “the most insane thing I’ve ever heard.”
I agree.
Financial systems function because of an incentive to succeed that by its very definition includes the possibility of failure. You can’t have one without the other.
Rogers noted this as well, saying that this is “the way the system is supposed to work – when you fail you fail – competent people come in and take over the assets.”
As he put it to me a few years ago during a conversation we had in Singapore just prior to our bailout here (and I am paraphrasing), “history is littered with the bones of failed financial institutions. Why should this be any different?”
The problem in Spain’s economy is the same as it was in Greece. They’re effectively handing over the reins and 100 billion euros to the same incompetent, incapable people who helped caused this mess in the first place.
The Spanish Bailout – A Euro-Comedy of Errors
Want proof? Look no further than how the 100 billion euros in “aid” is supposed to be disbursed.
The bailout cash is supposed to be put into the Fund for Orderly Bank Restructuring (who comes up with these names??!!) which has been created specifically to fund insolvent banks. Apparently the word insolvent doesn’t bother them one bit.
But that’s not the half of it.
This aid – and it’s a stretch to call it that without turning into a drooling idiot – potentially adds another 10% to Spain’s debt and takes it up to 80% at the end of this year. Factor in Spain’s national and European debt and total debt to GDP exceeds 140%, according to Lance Roberts of Streettalk Live.
In other words, the Spailout just threw that nation into the ditch they’ve dug for themselves.
I can only shake my head and recall the Australian comedic duo of Clark and Dawes who impeccably summed this up, asking, “How can broke economies lend money to other broke economies who haven’t got any money because they can’t pay back the money that the broke economy loaned to the other broke economy and shouldn’t have lent it to them in the first place because the broke economy can’t pay it back?”
I believe that the EU ministers have acted, once again, in knee-jerk fashion and without a complete understanding of the facts. Or worse – in deliberate omission of the facts.
Nobody knows how much money will ultimately be required. We won’t even have an inkling until June 21st. That’s when Roland Berger and Oliver Wyman are scheduled to turn in the results of their Spanish bank stress-test audits.
There is hope for a more complete picture, including audits of 14 of the largest Spanish financial institutions, but that data isn’t going to be ready until the end of July…at the earliest.
In closing, I realize that what I’ve shared with you today may be scary…downright terrifying even. Do yourself a favor and take it with a grain of salt.
Despite that European politicians can’t seem to understand the reality closing in on them like a gigantic anaconda, there are still companies busy building the future.
And those are the ones you want to buy no matter how bad it “gets.”
Keith Fitz-Gerald
Contributing Editor, Money Morning
Publisher’s Note: This is an edited version of an article that originally appeared in Money Morning (USA)
From the Archives…
Why You Should Wish For a Falling Market
2012-06-08 – Greg Canavan
Why the U.S. Dollar is Really Rising
2012-06-07 – Keith Fitz-Gerald
How This Bear Market Could Last Another 18 Years… Just Like Japan’s
2012-06-06 – Kris Sayce
The Banking Plan That Could Be A Game-Changer for Gold
2012-06-05 – Dr. Alex Cowie
Best Investment Strategies For the Times Ahead
2012-06-04 – Nick Hubble
