- Bailout of Bankrupt Spanish Banks Proving Impossible!
The Euro continued to fall today as bankrupt banks multiplied in Spain and a ratings agency downgraded the country’s credit to a very low B rating; it is becoming clear that Spain will ruin its national credit completely trying to bail out its failing banks, unless Glass-Steagall sweeps the continent from the United States.
There was an abrupt end to the Rajoy government’s flirtation with a perverse “anti-Hamilton” scheme of just issuing tens of billions of euros of new government debt certificates directly to Bankia et al.; the ECB announced that it would not treat them as collateral, nor would it make further loans now to Spanish banks. It became known that two (unnamed) banks have been forced to prematurely REPAY loans from the ECB totaling 30 billion euros — this is not supposed to be possible unless the ECB has judged those banks, or their collateral, to be unsound. When even the central bank is calling in bank loans, those banks are finished.
So the Spanish government, with its 10-year bond yield going up every day, said on May 29 that it plans to bail out Bankia and the Spanish regions by selling more Spanish sovereign debt on the market. Foreign Minister Jose Manuel Garcia-Margallo said it would also recapitalize its banks this way. But this is an impossibility. Half of Spain’s government debt is already at unsustainable interest rates, and these will explode if the government yields increase, let alone what they will be if the government tries to sell additional paper.
And how much additional sovereign paper? The bankrupt regions have 15 billion euros of debt coming due this year. The banking system needs at least five times that. The major Spanish banks are bankrupt beyond belief, and nobody believes their numbers because they are all hiding the non-performing real estate debt by avoiding trying to sell them — which would require marking to market. This was a good part of the Bankia shock when the bank “found another 13 billion in bad debt” as the government nationalized it; Santander and BBVA are probably worse. A Bloomberg wire today is headlined “Spain Delays and Prays That Zombies Repay Debt: Mortgages,” and it reports that “Spanish banks are masking their full exposure to soured property loans while they continue to prop up insolvent ‘zombie’ developers.” Nomura now estimates that 76.5 billion euros is needed this year in bank bailouts (it was 50-60 billion 48 hours ago). The reality is probably in the hundreds of billions.
And then of course the Rajoy government is vowing to perform all this impossible debt refinancing while sticking strictly to deep austerity targets in a shrinking, 25%-unemployed economy. This would guarantee a “Greek” spiral into national destitution, while the banks fail anyway.