Daily commentary: The Spanish bank bailout has already failed

Two weeks ago I argued Europe is on the brink of something very big. But the Spanish deal is not it. After the deal, markets rallied initially but soon afterwards, Spanish and Italian sovereign bonds sold off and are at the still elevated crisis level above 6%. The so-called EuroTARP, allowing Spain to receive monetary assistance from Europe to bail out its bankrupt and undercapitalised banks, is a dismal failure.

The deal, which is to use money from the temporary or permanent European bailout facilities EFSF and ESM, is slated to give Spain’s national bank restructuring facility FROB a 100 billion euro "line of credit" to extend to Spanish banks for recapitalisation. In double speak reminiscent of 1984, Spanish Premier Rajoy touted this bailout as a "victory" for the euro zone and bragged about his ability to secure better financing terms for his "line of credit" than other bailed out nations like Greece and Ireland, who had to suffer severe austerity as a pre-condition for their monies.

Nevertheless, this structure is problematic for a number of reasons:

  1. Spanish banks need more. Spanish banks will need much more money than 100 billion euros. So this bailout, while larger than the 40 billion being bandied about last week, is still inadequate by an order of magnitude. 400 billion euros would have been a real bazooka.
  2. Spain’s sovereign is still on the hook. The Germans have agreed only to allow a pass-through via the Spanish state bank bad bank fund FROB. This is not a EuroTARP along the lines I said was necessary in late April if Europe wanted to draw a line under the Spanish bank – Spanish sovereign connection.
  3. Italy is still suffering contagion. The deal does absolutely nothing for Italy which is next in line for sovereign risk in the euro zone. Any deal Spain gets MUST always keep Italy in mind or it will be a bust. Again, this is why a European-wide bank recap is necessary.

Bottom line: The Europeans have no stomach for anything meaningful. The euro zone policy responses are becoming ever more pathetic. A serious catastrophic failure is becoming more likely.

That’s it. Here are the links.

P.S. – I will have a lot more to say about this later today on Russia Today Television at 6PM and in later posts.

A Bigger Bailout Awaits – Tim Duy’s Fed Watch

Exclusive: Euro zone discussed capital controls if Greek exits euro: sources | Reuters

Romanians vote for less austerity | beyondbrics

Debt crisis: Europe’s democracies must not subcontract their destiny to the Bundebank – Telegraph

China and India ‘heading for economic slowdown’ – Telegraph

2011 annual reports for Irish banks reveal potentially catastrophic losses and additional bailouts requirements « NAMA Wine Lake

Spain’s Handling of Bankia – WSJ.com

Spain told it will be under troika supervision | Reuters

India could be first BRIC to lose investment grade: S&P | Reuters

Hussman Funds – Weekly Market Comment: The Heart of the Matter – June 11, 2012

Spain bank deal may not work, bolder reforms needed: Stiglitz | Reuters

Skeptical Spaniards pour scorn on Rajoy over rescue | Reuters

What Is Ireland’s Bank Debt and What Can Be Done About It? | Karl Whelan

Spain and the euro crisis: when €100bn doesn’t fix much | Editorial | Comment is free | The Guardian

Italy in focus amid fears of contagion – Telegraph

Spooky parallels between Great Depression and euro crisis – Telegraph

Indian retailers retrench as reform hopes dashed | Reuters

Spanish Bondholders May Rank Behind Official Loans After Bailout – Bloomberg

Sober Look: Eurozone citizens moving billions to Switzerland

The Irish Economy » Spain, Ireland, and austerity.

Finland Wants Collateral for Spanish Bank Aid From EFSF – Bloomberg

Spain Asks for $125 Billion Bank Bailout as Crisis Worsens – Bloomberg

Argentines’ Dollar Deposits Fall to Lowest Since April 2010 – Bloomberg

Analysis: India frustrations send some foreign firms packing | Reuters

Spain’s savings banks’ culture of greed, cronyism and political meddling | World news | The Guardian

Berlin is ignoring the lessons of the 1930s – FT.com

U.S. Oil Output Tops Six Million Barrels in Quarter – WSJ.com

UBS Gets Stung by Facebook IPO – Brett Philbin and Aaron Lucchetti – News – AllThingsD

EconoMonitor : RGE Analysts » Spanish Bank Bailout Unlikely to Succeed

Apple’s New MacBook Air Wedge Design Patent Could Destroy Ultrabooks. Sigh.

Google is Regaining Control of Android, Not Losing Control [Opinion] – Droid Life

China Set to Announce Steepest Fuel-Price Cut Since 2008 – Bloomberg

Iceland economy grows at fastest pace in four years | Reuters

Suicides Are Surging Among America’s Troops – News from The Associated Press

bailoutbanksfinancial newsSpain