The wheel keeps turning very nicely…

Courtesy of Mike Shedlock

” After insisting no bailouts would be needed, Spain to spend billions on bank rescue

Spain is planning a state bail-out of Bankia, the country’s third biggest bank by assets, in a move likely to involve the injection of billions of euros of public money into the troubled lender.

In an abrupt reversal of policy, the Spanish government, which had previously insisted that no additional state money would be needed to clean up the country’s banking sector, confirmed that an intervention was being prepared.

Some bankers and analysts have argued that BFA, Bankia’s parent company which controls the listed entity and houses the combined group’s worst quality assets, needs significantly more capital.

BFA said last week it had renegotiated €9.9bn of assets last year to avoid them being classified as bad loans, equivalent to 5 per cent of the bank’s €188bn loan book.

One adviser to Spanish banks and government agencies said that if the amount Madrid injected into Bankia was not sufficient, and did not involve a much improved management of its bad assets, then the plan risked achieving little.

“Just injecting capital would be the equivalent of rearranging the deck chairs on the Titanic,” the person said. “I think Spain has not admitted to itself just how weak some of its banks actually are and how serious the situation is.”

Liar, Liar Pants on Fire

• No one in their right mind believed Bankia did not need a bailout.
• No one in their right mind now believes Bankia only needs €7bn-€10bn now
• No one in their right mind believes the Spanish banking system is solvent

The only way Spain will not need a bailout is if it tells the Troika to go to hell, defaults on foreign-held bond, then exits the eurozone. Moreover, that is exactly what Spain should do, right now.

Spain will eventually exit the eurozone anyway, so the sooner the better. Sadly, the Spanish government is highly likely to rape its citizens with higher VAT taxes and bank bailouts in foolish attempts to prevent the inevitable, just as Greece has done.

Wasting €7bn-€10bn of taxpayer money, followed by double or triple that when the bailout proves to be insufficient is just plain stupid. Unfortunately, stupidity is rampant.”

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

INTERESTING…

Source : JPM

I am not sure that Spain really has an Exit strategy. It is a shame that we have lost 5 years by procrastinating the important decisions that needed to be made. I do not see Mr. Market buying any miracle any time soon…

NO WORDS NEEDED…

Check out the Spanish PMI !!! Austerity and the route to HELL…

WSJ

” Spain’s economic woes are deepening. Markit’s manufacturing purchasing managers index for March fell to 44.5, with costs rising and new orders declining, suggesting an accelerating recession. Youth unemployment rose to 50.5% in February. And the government’s budget is the most stringent for over 40 years. Spain faces a tough task in getting its budget maths to stack up.

Spain’s deficit target of 5.3% of gross domestic product isn’t totally unrealistic given the government’s commitment. It proposes to cut ministerial spending by 16.9%, and hopes to boost tax revenues both through an amnesty and tax increases, including corporate taxes. But it also forecasts the economy will shrink 1.7%. Many in the markets are skeptical: Economists at Citigroup C +1.01% forecast an economic contraction of 2.7% and a deficit of 6.6%.

Spain faces three key risks in achieving its budget target. First, while Spain’s track record suggests central government spending cuts are achievable, regional cuts are less certain. Spain’s regions account for 50% of public spending, mostly on health care, education and social services. They accounted for two-thirds of 2011′s deficit overshoot. For 2012, they are expected to reduce their deficit to 1.5% of GDP from 2.9%. But details on regional budgets are missing, and fiscal consolidation will require potentially difficult changes to Spain’s welfare state. The failure of the ruling Popular Party to gain control of Andalusia, the most populous region, potentially complicates policy coordination.

Second, the social-security budget may again run a deficit given rising unemployment. Last year, it posted a deficit of 0.1% of GDP versus an expected surplus of 0.4%.

Finally, questions remain over growth. Domestic demand is slumping due to austerity; credit conditions remain tight as banks still face the legacy of a real-estate bubble. Labor-market reforms will take time to help the economy adjust away from its over-reliance on construction and real estate. Spain is reliant on exports to offset the pain at home.

Stronger euro-zone or global growth would provide a cushion. Without that, the risk remains that Spain may need more austerity to hit budget targets, further harming growth. That could lead markets to lose confidence and spark contagion. Spain remains key to the fortunes of the euro zone.”

Steen Jakobsen, chief economist at Saxo Bank in Denmark discusses the illusion of cheap money, bond market yields, and the lack of European reform in his latest email.

In Spain, things are going from bad to worse. Last weekend’s local election in Andalucia, where Spain’s centre right People’s Party failed to secure an outright majority, left Prime Minister Rajoy without a mandate to carry on with tough austerity.

It was a bad start to week where we on Thursday will see a major general strike aimed at… Yes, you guessed it: Austerity measures.

Spain 10-Year Bonds and 5-Year CDS

Illusion of Cheap Money

The European story remains one of major promises and no actual reforms. A low interest rate and an extreme sense of “security” created by the illusion of easy money and low interest rates won’t last forever.

As I wrote in Interest rates: the market has it all wrong, we could be on route to an exit strategy from central banks which at a bare minimum will be a goodbye to “unconventional measures” and if so, the low in interest rate cycle is in place.

30 years of Japanisation?

The only way central banks can create a proper exit from unconventional is to hand over the torch to reforms from governments and politicians. Unlikely, yes, needed?

Absolutely, otherwise we are doomed to 30 years of Japanisation.