INITIAL THOUGHTS ON THE SPANISH BANK BAILOUT….
Another Sunday bailout of Europe. What else did you expect? By this point we’ve all seen this movie 100 times so this should not come as a big surprise. European leaders have made it clear that they’ll do anything to avoid a Lehman 2.0, but the problem is that they won’t do enough to actually fix the Euro.
In case you haven’t heard the news yet, here’s Reuters:
“(Reuters) – Euro zone finance ministers agreed on Saturday to lend Spain up to 100 billion euros ($125 billion) to shore up its teetering banks and Madrid said it would specify precisely how much it needs once independent audits report in just over a week.
After a 2-1/2-hour conference call of the 17 finance ministers, which several sources described as heated, the Eurogroup and Madrid said the amount of the bailout would be sufficiently large to banish any doubts.
“The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to 100 billion euros in total,” a Eurogroup statement said.”
What we have here is another avoidance of the worst case scenario, but not enough to solve the structural problem in Europe. This is and has always been a currency crisis stemming from the flawed structure of the currency union. This debt issue that’s ravaging the banks is just a symptom. Goldman summed up the latest move pretty succinctly (via Business Insider):
“Will this step be sufficient to forestall a broader programme for Spain with additional conditionality? By itself: No. Instead, in our view it needs to be accompanied by a fiscal plan specifying fiscal measures that will set Spanish debt on a sustainable path in the medium-term. This is still less of a Euro area-wide solution, but continues in the spirit of a country-by-country approach.
A one-off loan of less than €100bn or 10% of GDP is not, by itself, a major threat to Spain’s debt sustainability. The threat to Spain’s debt sustainability instead comes from the lack of a medium-term plan to stabilise its debt-to-GDP ratio over the next 5 or so years. The weekend’s announcements will do little to change that.”
So, this is simple. It’s enough to avoid the worst case scenario that many investors have been fearful of lately, but not enough to fix the underlying problem. This means depression continues in much of Europe and the politicians buy themselves a bit more time to come to a workable long-term solution. And of course, the banks get bailed out and Germany’s economy won’t be ravaged by a credit crisis as they hope things magically turn around and no major concessions are needed on the fiscal side of the currency arrangement. This is a short-term solution that won’t work to fix Europe, but gives them all more time to come together on something permanent….
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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46 Comments
Futures up big again. Looks like your algo nailed another call.
An interesting perspective on Business Insider. The Eurozone has never allowed a single bank to fail. Depositors have always got their money.
http://www.businessinsider.com/the-one-thing-you-never-see-in-europe-bank-failures-2012-6
They must have concluded long ago that they can’t afford to allow ANY bank runs to happen.
So Spanish sovereigns just got subordinated to the EFSF or whichever entity ultimately makes this loan. It will be interesting see how sovereign spreads react and what the half-life of the knee jerk short covering rally we get off this will be. Resistance to real solutions in Germany seems to be stiffening.
This Euro crisis is getting boring now. Yawn another bailout, another rejection of every substantive solution. Sometimes I actually hope for a Lehman 2.0 so we can get some new financial headlines.
I see the posting forum was disposed of…No surprise…
It was moved over to monetary realism, not disposed of.
What needs to be done:
1. Guarantee the deposits.
2. Let the banks go bankrupt.
3. Change the taxlaws. Get rid of any taxlaw that encourages taking on debt.
4. Abolish any favourable write-off tax/accounting rules.
5. Close tax loop holes.
6. Start all over again.
Sure, the one and only evil here is Germany, right ? What about the french and italian banks that are holding spanish bonds ?
Futures are up substantially and European markets are going bananas on the news, +2% as of 10am UK time. I can’t help but feel like I have heard this song before, and not too long ago. The LTRO salve had the same impact, but was surprisingly short lived. Have investors already forgotten that a spoonful of sugar does nothing if there is no medicine going down along with it?
I’m still down 250bps since LTRO, seriously considering taking some off the table before the sugar high from this bailout fades.
Have been selling part of my Spain longs (built up position near 6000) this morning. IBEX has cut gains since the opening.
I think if nothing else changes the next leg down will start forward this week or next. Could be wrong though, that’s why I’ll keep some long exposure and won’t sell until I see further decline. Either way I don’t see a further advance of the index beyond the 7000 so…
This ain’t fixing the real economy as you say so situation will deteriorate, along with ‘fiscal sustainability’ given nations have surrendered monetary independence. Economy is going to continue be depressed and real growth no where to be seen. balance of payment problems will continue. Through inflation or deflation readjustment must happen and this will deteriorate core economies too (employment may suffer).
This is the major risk to the ‘United States of Europe’ project elites are trying to advance building up the net of dependencies and liabilities, centralizing them towards Europe (sure they read Alexander Hamilton). If ‘growth’ and prosperity does not come back it all will blow out and this experiment will end very bad in the next decades.
It is remarkable how the risk-on market gains have faded. The closer investors look into this particular bailout, the more suspicious it gets. Spain is resisting any conditions in return for receiving this bailout loan. Treasury yields were way up last night, but now they are close to unchanged. This bazooka shot appears to be more like a pop gun.
I just want it all to end. I’m so sick of all this BS.
Get your effing act together Europe. Jesus Christ. America has one week of stalled debt cieling talks last summer and we’re “holding the world hostage” and these clowns do it for 3 straight years and nobody gives a flying fuk.
It’s sooo true…a continent that does NOTHING! Get off your a$$es and fix this!
But what has the U.S. fixed? Nothing structurally either – still TBTF banks and a captured political body. Only reason anything is ‘better’ is our ability to print at will. Just as Japan and U.K. can and hence hold no one hostage. If all these Euro countries were independent none of this would happen. So comparing U.S. to Europe is funny – U.S. did all the same ‘solutions’, they just have the power of the printing press. There is nothing intellectually or politically better about that.
We amassed the political will to make $hit happen back in 2008.
If we didn’t have a printing press back then we would have found a way to amass the political will to create it.
This is the difference.
And how would you suggest to fix it? Can anybody really expect Germany to bail out the club med? Even if they wanted (and they don’t) – they couldn’t as this would destroy even Germany’s credit rating. Apart from that it would amount to moral hazard that Germans had their belts tightened already (e. g. they raised the retirement age to 67), had their social security system reformed (which means they are getting less whereas the contributions were raised), and had no loan increases (in real terms) for the last decade and then should have to bail out countries like Greece (retirement age 55) where they had loan increases of more than 40% over the last decade.
The German electorate really would not appreciate this. Would you if you were in their shoes?
The solution has been obvious from the beginning. Obvious, not easy.
Split the core from the rest.
That’s a temporary fix too. In a no-growth environment we are we would have trouble again in 3 or 5 years.
It’s a political (and by extension, fiscal) problem and it has to be solved politically (and fiscally). The same way there are disagreements between Germany and others with regards to the ECB we would have the same problem again in little time.
This ain’t going no where: Restore any sort of democracy in sovereign nations or build an authoritarian European Empire, anything in between won’t work or will be a path to the ultimate objective of creating that empire, crisis by crisis every X years.
No growth is the new normal and this fucks up everything.
BUNDS don’t seems to be impressed.
If the market lifts offs over the Spilling of the Spanish Beans then the Feds hands will be tide…….. trade them carefully.
Peanuts. Let’s assume the cost of being in the Euro is 20% unemployment, 22k Euro average salary, 1/3 unemployment benefits =~ 67B E/year. When Germany says they’re willing to pay that (along with all the agricultural subsidies) than the Euro will be saved. Otherwise, Spain will be out within 3 years, although they did put up with Franco 40 years, so maybe the Spanish are use to pain. The pain in Spain falls gently on the (Castillian) plain.
Let’s face it. Financial tricks can help kick the can here and there, but in the end someone needs to roll up his/her sleeves and get to work hard with a fraction of the privileges from the past.
Financial bailouts are the equivalent of trying to contain a flooding river by moving the water from one container to the next. This can create some respite, but eventually one needs to get rid of the water altogether, and that takes time.
Morgan Stanley Sent out a piece called a Road to Euro Redemption suggesting the use of ERF (Euro Redemption Fund) as the viable instrument to deal with debt overhang. “The ERF would create a very large pool of high quality Euro-denominated assets (EUR 2,5 trillion)” and
“The basic idea of the ERF is to pool the present debt overhang,
i.e., the general government debt exceeding 60% of GDP”
This is the same line of what you mentioned here: avoid Lehman 2.0 and the worse case scenario.
“A European debt-redemption fund that was first proposed by
the German Council of Economic Experts (GCEE) last
November seems to be getting more and more traction in the
policy debate.”
I am to the idea that growth in europe will not matter for markets, it can sit still for very long time, if we can get the confidence thet markets will not freeze from sistemic risk and we see America leading to growth as we muddle through followed by local markets from the Brics. So I am more to the case that by avoiding the worse case risks are skewed to the upside.
““The basic idea of the ERF is to pool the present debt overhang, i.e., the general government debt exceeding 60% of GDP””
This blue bond/red bond scheme is just another attempt to steal money from the German, Dutch, Finish and Austrian taxpayers; to avoid the GIPSIFs have to take tough structural measures in their own desolate economies. And it won’t work since, as Tyler Cowen correctly notices:
—-
1. GDP figures will be manipulated, to allow for the issuance of more guaranteed debt.
2. The key is guaranteeing the banks and their deposits, at reasonable cross-border cost. This doesn’t accomplish that.
3. Presumably a country has to pay back its joint bonds first, otherwise it is too easy to pass the buck on those and just pay back the national bonds. That makes the purely national bonds subordinated debt and may raise rather than lower their risk. Real private sector lending is already becoming subordinate to an unworkable degree, given all the “first in line” public lenders involved.
4. Germany still ends up with its finger on the “send you (and me) to doom” trigger, which already isn’t working out in the Greek situation. If Spain or Italy is approaching insolvency, can the Germans really withdraw credit? Didn’t the ECB just lend over a trillion euros, starting December 2012? How well is that going? Is Germany finding it easy to say “nichts mehr!”, or is the pressure for ever-greater bailouts integration? Why should the Germans let themselves be led further down that gangplank? Why not just call the plan “Germany commits to no more bailouts, not ever, ever again” and cross your fingers behind your back?
Well that was short lived. Anyone buying the IBEX at 6000 could have sold out at 6800 today. Not a bad gain especially if leveraged.
I think its back to 6000 again soon and all eye’s on Germany again. Spain is still out of the market, so while they dont have to fund their banks any more, they still have to fund themselves and the regions..
Oh hum.
The call for central banks to buy private assets outright is going to reach a fever pitch. ZH had the BOE post today on just that…
Bernanke is going to have to man up and start buying the SPY, if he’s not already.
The scary thought is not the unconditional bail-out precdent that was set today, but the possibility, should the market fail to ramp into the close, that bail-outs have cease to drive risk assets higher.
When Dalio talks about the “orderly” de-leveraging vs. those from history that the Fed has engineered, the ability to keep risk assets propped is the magic ingredient to this success…
If this magic geenie went “poof” today, we’re in trouble. Not even the shorts win at that point.
B Ferro,
>If this magic geenie went “poof” today, we’re in trouble. Not even the shorts win at that point.
What do you mean by this? If the juice doesn’t work on the patient anymore, the market will crash and shorts will win, no? Or are you saying that if this happens we will be in such dire straights that no one wins at the end because we will be in total chaos, so you lose even if you are short the market?
Yea, I’m saying if the magic geenie doesn’t produce the desired result anymore we’re all in trouble.
Bernanke isn’t a dummy – he targets equities, and not the economy, because he knows he’s powerless when it comes to generating recovery. We all think he believes he’s still got power to generate economic rebounds. I disagree – he knows QE is futile. However, he does believe he has power to juice equiites and he also knows that it’s ultimately more important because equities hold the glue in place during de-leveraging.
Higher equity prices are the ONLY thing separating this de-leveraging from others in history – if you lose that you lose it all (doesn’t have to be a depression, could be Japan style)…
That’s why I say that unless we start to see equities ramp here very quickly on this news, we potentially set a precedent far worse than unconditional bailouts today – that precedent is equities responding with a down day to bail-outs / stimulus…
“When Dalio talks about the “orderly” de-leveraging vs. those from history that the Fed has engineered, the ability to keep risk assets propped is the magic ingredient to this success…”
Actually the magic ingredient is a proper balance struck between deficits and money printing in order to keep nominal growth above nominal interest rates. See the first sentence of page 5:
http://www.bwater.com/Uploads/FileManager/research/deleveraging/an-in-depth-look-at-deleveragings–ray-dalio-bridgewater.pdf
Where would I be without the incredilby resourceful BJM pointing me in the right direction.
Conditions on the bailout loan? Conditions? We don’t want your stinkin’ conditions!!
http://online.barrons.com/article/SB50001424053111904470204577446414018834948.html?mod=BOL_hps_highlight_top#articleTabs_article%3D1
Felix Zulauf warns that risk levels are very high now.
The Economist’s Zanny Minton-Beddowes still saying that real, if limited, steps toward fiscal union needed asap – ie some form of Euro-bond (and there is not time for all the political arrangements Merkel wants beforehand).
Ok, the Paranoids have completely run away with me now. I have this insane belief that every time the DOW gets close to dropping through 12k, some magic man behind a curtain pulls a lever and POOF!, the market rallies back up. Should I pay attention to the magic man behind the curtain or just get another refill of Prozac?
The problem is government, plain and simple. Does no one read history? Adam Smith called it long long long ago. New theorists are hysterical.
Cullen is right that we won’t have hyperinflation, we will just have a good bout of inflation before everything is restructured.
The working man gets screwed, once again. But what else is new.
I was in Vegas this weekend for the fight and EDC(kaskade killed it at Marquis Sat. night)
I put money on the Heat +8..and Bradley 3 1/2 to 1. I was on a conference call regarding the Spanish Bailout Saturday as I hit the Mad Greek Restaurant in Barstow and then on the way back with futures ramping up to 5000 points.
I couldn’t help but think…the markets were like Bradley. You lose the fight but policy makers let you win.
I woke up this morning expecting to close out my shorts and would go long into the fed meeting 1/4 end. But…since when did the markets start to do what they should have a long time ago. Sniff out the truth. I’m scratching my head today trying to figure out like the bradly fight how I made money today on a bailout being short???.
Confusing market. Only the Nevada Judges know what’s going on.
Long Weekend..Baker not Barstow…don’t even know the Cities after a weekend like that
Anybody who wants to short this market…
Do so with a stop a@ 1340 on the SPX or if we see two straight closes above 1325.
Continue to believe that if the path of least resistance is down, it will be hard, fast and with impunity, likely to 1050 before any bounce.
We’ve had 3 bailouts. Spain now being the 4th.
Looking at the data SPX, SX5E, EuroUSD and Gold. The only asset class 5 day, 1 month, 3 motnth and 6 month that went up was Gold.
You know I’m not a gold bug. But with our short position we’ve had on since Friday I’m taking this up slightly.
Only the bailout of Ireland on 11/21/2010 had the SPX up out 3 months, 6 monts. Besides taht sample The SPX returns after these bailouts are terrible.
Gold on average out 1 month- 2.1%, 3 monts 2.17% and 6 months 13%. In the context of what will be required by CBs we will take our weighting up from 5% currently into the yellow metal.
Sorry confusing
Gold 1 month positive 2.11% on average.(NOT -2.1%)
Right now reminds me of this great Coolio jam…
Get ready for the ride…though I’m not sure we’re going to the place where “everybody kick it”…
http://www.youtube.com/watch?v=cbhkuu4e0iw
Remember- We make more money by not jinking our positions.
The market gives you exactly what you want from it. I want to make money not to be a prophet. I’m going silent now. The market gods will honor this.
Fair point. Duly noted.
Did you know that “bug” as in gold bug is actually an acronym not a state of mind………..
@B Ferro, your short call at 3;01pm EDT today so far was a good one, thanks.
@VII, it remains to be seen whether your “long gold” plug will work out in an apparently deflationary environment which we seem to be in. Felix Zulauf recently said to buy gold only when it falls below $ 1500. I might buy it at $1525, but not at current levels. I’m holding a lot of Bill Gross’s BOND etf and Gundlach’s DoubleLine fund. A continued SPX plunge to test the 6/1 low may be the next step.
WE own 5% today. I added some stuff and couldn’t get into the Gold stuff. My team shows some good data on Gold but I confirm everything with the Price action and I did not get a chance to do that. I got on some calls and forgot..
A weekend in Vegas staying up until 4:00 A.m listening to Kaskade kill at Marquis for EDC..after winning BIG on the Bradley Fight this weekend and I’m forgetting alot today.
I hate to say this to you Larry…But I was with a dear friend who is a Celtic fan this weekend and I put money down on Miami -8. And well let’s just say I felt so bad I picked up Dinner for everyone. Sorry Larry…I hate Miami but I had to take that bet.
@VII, don’t apologize for betting on your gut feel. Always go with your gut. Today I’m mourning the fact that my beloved Celtics have been eliminated. But I’m enjoying the fact that I made some money today in the market, was positioned well for the reversal from this morning. As you say, that is our primary job, and I thank you and Cullen for helping me do it better.