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:

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.
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.
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