Spain carnage reveals rescue fund fig leaf

[marmar]

FRANKFURT (MarketWatch) — Empty-handed European policy makers may have little choice but to turn to a reluctant European Central Bank to tame fears that Spain, the euro zone’s fourth-largest economy, may soon require a full-fledged sovereign bailout after borrowing costs soared Monday to crisis levels, strategists said.

“The pressure will be growing on the ECB to do something,” said Piet Lammens, fixed-income strategist at KBC Bank in Brussels, while acknowledging that the central bank remains deeply reluctant to head down that path again.

The yield on Spain’s 10-year government bond jumped a quarter of a percentage point to 7.44%, setting a new euro-era high after pushing well above the 7% level generally viewed as unsustainable over the long run in terms of borrowing costs. Yields rise as bond prices fall.

“The rise in the 10-year yield well beyond 7% carries a very distinct reminder of events in Greece in April 2010, Ireland in October 2010 and Portugal in February 2011,” said Simon Derrick, senior currency strategist at Bank of New York Mellon in London. “In each case a decisive move beyond 7% signaled the start of a collapse in investor confidence that, in each case, led to a bailout within weeks.” ...................(more)

The complete piece is at: http://www.marketwatch.com/story/spain-carnage-reveals-rescue-fund-fig-leaf-2012-07-23?dist=lcountdown

[dipsydoodle]

1. Europe shaken by fear Spain will need full bailout

FRANKFURT, Germany (AP) -- Europe is on the brink again. The region's debt crisis flared on Monday as fears intensified that Spain would be next in line for a government bailout.

A recession is deepening in Spain, the fourth-largest economy that uses the euro currency, and a growing number of its regional governments are seeking financial lifelines to make ends meet. The interest rate on Spanish government bonds soared in a sign of waning market confidence in the country's ability to pay off its debts.

The prospect of bailing out Spain is worrisome for Europe because the potential cost far exceeds what's available in existing emergency funds. Financial markets are also growing uneasy about Italy, another major European economy with large debts and a feeble economy.

Stocks fell sharply across Europe and around the world. Germany's DAX plunged 3.18 percent. Britain's FTSE dropped 2 percent and France's CAC 40 fell 2.89 percent. In midday trading on Wall Street, the Dow Jones industrial average was down 1.35 percent. The euro slipped just below $1.21 against the dollar, its lowest reading since June 2010.

http://hosted.ap.org/dynamic/stories/E/EU_EUROPE_FINANCIAL_CRISIS?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2012-07-23-14-00-15

How Much Trouble Is Spain in in The EU ?

The economic uncertainty in Spain and in the EU in general is very high. Spain is already troubled by how to pay for the 19 billion Euro bailout of Bankia, which Spain nationalized recently as the first part of Bankia's rescue. Bankia still has many bad debts (estimated at 32B Euros). It could require even more funds in the future. The Bank of Spain has estimated that the country's banks are sitting on 180 billion Euros in tenuous assets due mostly to the real estate bubble there. Another source cited the Spanish government as saying that Spain has approximately 320B Euros in bad real estate loans. CNBC today gave this number as 400B Euros. The Spanish banks have been hiding real estate losses for years now, hoping for an economic upswing. That is clearly not coming soon. In fact Christine Lagarde has suggested that the EU may experience a "lost decade". It is time for Spain to pay the piper. The rating agencies have been downgrading Spanish banks aggressively in acknowledgement of this. For example, Moody's downgraded 16 Spanish banks in mid-May. Many other agencies have been doing the same thing.

The above is only the tip of the iceberg. Spain's central government has to refinance 117.5B Euros in debt by the end of the year. It must also fund 52B Euros due to this year's budget deficit during that same time. In addition, Spain's 17 autonomous communities need to refinance 36B Euros in debt, and they need to raise a further 15B Euros to fund their budget deficits for this year. The autonomous communities have even worse credit than Spain itself. Spain is still developing plans that will allow the autonomous communities to access the credit markets. All told the above debt sales will total 220.5B Euros, and that is before you figure in the likely tax shortfalls. It is before you add in what might be more than the probable 320B - 400B Euros the Spanish government/CNBC suggests is the amount necessary to cover the real estate bubble induced bad bank debts. Roughly 600B Euros is close to one half of Spain's GDP. This is tantamount to the US providing $6T to pay down its debt for one year. Ouch! FYI, using the US ten year treasury bond yield as a calculation basis (less than 2%), Spain would be paying only about 16B Euros in interest on roughly 800B Euros in debt. As it stands Spain would have to pay three times as much (about 48B Euros). The difference between this and the figure a country with the US' bond yield rate would have to pay is more than one half of the budget deficit of Spain for the year. Spain might be close to meeting the EU's requirement of no more than a 3% budget deficit, if it had Germany's borrowing rate.

The government estimates that the new austerity measures for this year will cost Spain -2.6% in GDP growth, and that is without figuring in any other factors. The Spanish retail sales data reported last week a 9.8% drop year over year. Spanish Industrial Production dropped 8.3% year over year in data reported June 6, 2012. The Spanish Manufacturing PMI was reported as 42.0 on June 1, 2012. This is significant contraction. At last report Spain's unemployment was 24.44%, and that figure is an understatement. Aliens are not included in the government figure, and there are a high percentage of unemployed aliens in Spain. The Chinese Manufacturing PMI for May was reported at 50.40. This was down from 53.30 the previous month, and it was below the expectation of 52.20. The Chinese HSBC Manufacturing PMI was even lower at 48.40. This has helped the negative feelings about Spain along.

Spain's central bank also reported recently that 97 billion Euros in capital had been pulled out of Spain in the first quarter. How is Spain going to grow its economy when it loses capital at a rate that is almost 10% of its GDP in one quarter (Q1 2012). Foreign investors are scared. They are selling Spanish assets, so they don't get fooled as they did by Greece. FDR used to say in his famous Fireside Speeches, "We have nothing to fear but fear itself." The Europeans do not have FDR, and they are not all part of one country. That very fact seems likely to be the undoing of the Euro.

http://seekingalpha.com/article/643211-how-much-trouble-is-spain-in-the-eu