Euro Crisis

Anonymous Source Indicates that Spanish Officials Discussed the Possibility of a Bailout

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The Spanish Economy Minister, Luis de Guindos, discussed the possibility of an EU/IMF sovereign bailout with his German counterpart Wolfgang Schaeuble, according to an unnamed source. After the bailout package for Spanish banks failed to reassure investors the possibility of a bailout similar to the ones given to Portugal, Greece, and Ireland became increasingly likely and more widely discussed. Spanish officials have been denying that such a measure will be needed. Today a spokesman for the Spanish government reiterated that position:

We strongly deny any such plan. This possibility (of a 300-billion-euro rescue for Spain) has not been looked at and has not been discussed.

The amount that was supposedly discussed by de Guindos and Schaeuble, 300 billion euros, is three fifths of the 500 billion euros that will be in the European Stability Mechanism, the constitutionality of which is currently being considered by the German Constitutional Court. 

The news of a possible Spanish bailout comes after Brussels officials acknowledged that Greece has fallen far short of its reform targets, and could not be saved by a second bailout installment.

Seeing the situation in Europe deteriorating President of the European Central Bank, Mario Draghi, stated yesterday that the ECB would do whatever is necessary to save the single currency:

Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.

The statement managed to lower Spanish borrowing costs from the highest they had been since Spain adopted the euro. However, borrowing costs remain worryingly high.

German Chancellor Merkel and French President Hollande also reaffirmed their commitment to the eurzone in a joint statement today:

Germany and France are deeply committed to the integrity of the euro zone. They are determined to do everything to protect the euro zone.

Regardless of the level of commitment Hollande, Merkel, and Draghi have to the single currency project it is looking increasingly likely that Greece will not be able to stay in the eurozone and that Spain will accept a soveriegn bailout. Greece has failed to keep to the commitments laid out in the bailout agreement, why anyone would think that Spain would be able to behave more responsibly remains unclear.

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  1. During a banking crisis everything officials say is a lie. They will say there is not a crisis right up until the moment they admit there is and take billions or trillions to “solve it”. They will say there is no bailout right up until there is one. That there will be no freeze on accounts right up until they freeze the accounts and so forth.

  2. During a banking crisis everything officials say is a lie.

    So true. Spain desperately needs a bailout of its banking sector, which is beyond rotten with bubble-era real estate paper.

    Here’s my prediction: Germany is the only possible source of money to bail out anybody.

    Germany already has laid the fuse to withdraw from the Euro, to the point where Germans are already using old DMs they still had laying around for small cash purchases.

    Germany is saying nice things about the Euro, while doing nothing but delaying any action.

    It will be political suicide for any German politician to engage in any bail-outs. Even their friendly chit-chat has put their AAA rating at risk, and German voters are pissed. The Weimar hyperinflation left a scar on the German psyche far worse than the Depression did on the American psyche.

    Greece will drop the Euro because it will have no other choice. Greece actually runs out of cash next month, and the German court considering the constitutionality of the bailout mechanism won’t rule until September.

    When Greece drops out, Spain won’t be far behind. And then the Euro will contract to a Northern European currency.

    1. The problem isn’t the currency per se. What Greece needs to do is default. I suppose dropping the Euro is a form of default but not the only way. The real issue is how to deal with the bond holders (banks and indviduals)I mean besides point and laugh at them.

      1. What Greece needs to do is default.

        I think you mean, default again. They already fucked some of their private bondholders out of 90% of their principal once.

        A declared default would trigger derivatives held by, you guessed it, banks. Who knows what that would do to the global financial system, but you can be sure it would, at a minimum take down some big boys, and the splash damage would be considerable.

        Plus, I don’t think they can have a declared default and continue to use the Euro, but I’m not sure about that.

  3. OT: Union thugs beat up workers at non-union worksite in Philadelphia

    Gillespie dismissed the seriousness of the attack, saying the videos had been edited to make the violence appear one-sided. “I don’t know of anyone getting beaten. Some pushing, maybe,” he said.

    Because what Philadelphia needs is to make it incredibly expensive to build things there.

    1. GILLESPIE SAYS NO.

    2. I’m sure there’s a fascinating story out there somewhere, Spoony. Damned if I can get there from here, though.

  4. Uh, hello, alt-text?

  5. I had a thought the other day:

    The real reason Spain needs a bailout is because the ECB won’t buy their paper.

    If the ECB just strolled up and bought Spanish debt, voila! Borrowing costs would drop.

    This is the mechanism the Fed is using to monetize our own debt.

    The ECB won’t do this, and (currently) says it’s illegal for them to do it.

    Isn’t this where the end game gets fought out? Don’t the debtor states just get the ECB to change its policy? Germany might say, “That’s illegal!” but it’s not like states aren’t lawless any other damn time they feel like it.

    Also, couldn’t the debtor states just go all “Ron Paul Rump Convention” and declare a rump ECB and just have it start issuing euros? What’s so magical about the existing ECB and its euros? Legality? Spain and Italy and Greece and the rest routinely laugh at legality every other which way, why not here? What’s stopping them from appointing a “People’s ECB” and pumping out euros? The banking system isn’t independent enough to keep “bad” euros out, not given the level of control European states have over their banks. “They’re euros ’cause we say they are!” If Madrid says that to all Spanish-based banks, who stops them?

    1. Pretty sure there are EU laws against counterfeiting the currency. If they are going to just print cash, they may as well just print pesetas or drachmas.

  6. Isn’t this where the end game gets fought out?

    Yeah, the other “financial stability” mechanisms are hopelessly inadequate, if they even exist at all.

    Don’t the debtor states just get the ECB to change its policy? Germany might say, “That’s illegal!” but it’s not like states aren’t lawless any other damn time they feel like it.

    Doing so would cause Germany to pull out (I believe; its political, so anything can happen). If Germany pulls out of the ECB, the Euro collapses, and the global financial system collapses with it.

    Could a rump ECB exist? Sure. But the enormous devaluation of the Euro it would entail would gut every Euro-denominated bond on the planet, destroying the financial system in the process.

  7. Could a rump ECB exist? Sure. But the enormous devaluation of the Euro it would entail would gut every Euro-denominated bond on the planet, destroying the financial system in the process.

    But if the PIIGS are going down anyway, then what do they have to lose by threatening this? (Knowing full well that QE3 will be on the way to bail their asses out.)

    1. Here’s the problem with monetizing the debt (including its variation, QE) and why it can’t save the financial system.

      If you monetize existing debt, you are removing collateral assets from the banks, and replacing it with cash. That does . . . interesting things to the bank’s balance sheet (which I am not enough of a technician to explain, but I believe those who tell me that its not a good thing), but mostly it pumps cash into the economy. When inflation inevitably follows, interest rates spike. When rates spike, government borrowing costs (what, you thought they were going to balance their budgets?) spike, and we’re right back where we started on the sovereign side.

      On the private economy side, spiking interest rates devalue the debt that’s still out there, crashing the balance sheets of whoever holds it, and, of course, drying up credit and triggering a massive recession/depression.

      There’s no magic wand to be waved that makes leverage just disappear. All debt is always paid off, one way or the other; its just a question of who foots the bill. Monetizing/QE/inflation means that the bill is presented to people who didn’t borrow the damn money in the first place.

      Deleveraging is, by definition, demand destruction. There’s a lot of demand destruction in our future, folks, and there’s no way to avoid it.

  8. We strongly deny any such plan. This possibility (of a 300-billion-euro rescue for Spain) has not been looked at and has not been discussed.

    I never believe anything until it’s been officially denied.

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