Sunday, June 10, 2012

Europe to Give/Loan Spain $125 Billion to Recapitalize Spanish Banks Who Will then Use New Capital To Loan Money to Spanish Government - But This is Not a Bailout

Fed Ex to Europe:  Where Do You Want the Fig Leaves Delivered?

Here is the headline in the Financial Times after Spain agreed to accept a $125 billion bank bailout from Europe

Last updated: June 10, 2012 8:24 pm

Rajoy presents Spain bailout as ‘victory’

Wow, here everyone else thought that after denying for weeks that Spain would need any help for its banks from Europe the fact that they are now asking for the paltry sum of $125 billion might not be classified as a ‘victory.

In announcing the victory Spanish Prime Minister Mariano Rajoy said this.

Prime Minister Rajoy - The Face of Victory
"This year is going to be a bad one: Growth is going to be negative by 1.7%, and also unemployment is going to increase."

Maybe the term “victory” means something different in Spanish than it does in English.

It seems that Spain’s right wing government also has trouble with the meaning of the world “bailout”

Members of Mr Rajoy’s centre-right government have repeatedly denied that the EU aid agreed at the weekend is a “bailout” or a “rescue”, arguing that such a programme would have been necessary only if they had not introduced radical fiscal, labour market and financial sector reforms since taking office in December.

“If we hadn’t done this in these past five months, what was put forward yesterday would have been a bailout of the Kingdom of Spain,” Mr Rajoy said on Sunday. “Because we had been doing our homework for five months, what did happen yesterday, what was agreed, was the opening of a line of credit for our financial system.”

Okay, let’s all understand what has happened here.  Spanish bank, indeed the entire Spanish banking system was about to collapse.  This was due to bad real estate loans left over from the country’s real estate bubble.  Furthermore, Spanish banks are the only one’s willing to lend the government money, so Spain’s entire economy was about to do what might be called a “Greek Revival”.  So the regulation of the Spanish banks is now about to become a European matter.

But the new loans, expected to be negotiated before the end of the month, will not be condition-free. Olli Rehn, the EU’s top economic official, made clear on Sunday that it would be the European Commission and other international experts, and not the Spanish government, that would decide how much Spain’s banks need.

In addition, the commission is expected to impose tough new measures on Spain’s financial sector overhaul, which some officials believe has gone too slowly and only contributed to market uncertainly. “Spain has been the epicentre of the market turbulence recently,” Mr Rehn said yesterday.

And because the new loans will jump to the front of the line in terms of credit protection, it may be that Spain’s fiscal situation will be even worse than before, assuming that is possible.

Despite enthusiastic support for the plan from EU leaders, it remains uncertain whether it will relieve the pressure on the Spanish government. The bailout loans will be funnelled through the government’s books, potentially adding as much as 20 per cent to Spain’s sovereign debt, which could spook financial markets.

Eurozone leaders did not specify whether the money would come from the current €440bn rescue fund, the European Financial Stability Facility, or the new €500bn fund, the European Stability Mechanism, which is due to go into force next month. Under the terms of the ESM treaty, loans from the ESM take priority over all private sector debt, which could spook potential buyers of Spanish sovereign debt.

Translation:  The Spanish banks will use the new capital to buy Spanish government bonds.  The will then use those bonds as collateral to borrow money from the European Central Bank. Part of what is going on here is the ECB bailing out failed policies of both the right and the left in Spain, but no one will ever admit that, so disregard the fact that you heard it here.

Okay, everybody gets to exhale a sigh of relief, but only for a few days.  On Sunday the Greeks vote on whether or not to accept the European imposed austerity plan and destroy their economy, or to reject the plan, leave the Euro and the Euro Zone and destroy their economy.  Anybody wondering what the result will be? 

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