Mish's Global Economic Trend Analysis

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Spain Blinks: Accepts €100 Billion Bailout Via EFSF/ESM; FROB to Receive the Money Posted: 09 Jun 2012 03:02 PM PDT After months of denials, a short Eurogroup Statement shows Spain will submit a formal request to Brussels for a bailout.  Here is the statement in full. The Eurogroup supports the efforts of the Spanish authorities to resolutely address the restructuring of its financial sector and it welcomes their intention to seek financial assistance from euro area Member States to this effect. The Eurogroup has been informed that the Spanish authorities will present a formal request shortly and is willing to respond favourably to such a request. The financial assistance would be provided by the EFSF/ESM for recapitalisation of financial institutions. The loan will be scaled to provide an effective backstop covering for all possible capital requirements estimated by the diagnostic exercise which the Spanish authorities have commissioned to the external evaluators and the international auditors. The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to EUR 100 billion in total. Following the formal request, an assessment should be provided by the Commission, in liaison with the ECB, EBA and the IMF, as well as a proposal for the necessary policy conditionality for the financial sector that shall accompany the assistance. The Eurogroup considers that the Fund for Orderly Bank Restructuring (F.R.O.B.), acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned. The Spanish government will retain the full responsibility of the financial assistance and will sign the MoU. The Eurogroup notes that Spain has already implemented significant fiscal and labour market reforms and measures to strengthen the capital base of the Spanish banks. The Eurogroup is confident that Spain will honour its commitments under the excessive deficit procedure and with regard to structural reforms, with a view to correcting macroeconomic imbalances in the framework of the European semester. Progress in these areas will be closely and regularly reviewed also in parallel with the financial assistance. Beyond the determined implementation of these commitments, the Eurogroup considers that the policy conditionality of the financial assistance should be focused on specific reforms targeting the financial sector, including restructuring plans in line with EU state-aid rules and horizontal structural reforms of the domestic financial sector. We invite the IMF to support the implementation and monitoring of the financial assistance with regular reporting. Treasury Secretary Tim Geithner issued this meaningless statement on Spain following the Eurogroup announcement. We welcome Spain's action to recapitalize its banking system and the commitment by its European partners to provide support. These are important for the health of Spain's economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area. Lip Service to Reforms In the Eurogroup statement, notice the lip service to Spain's "significant fiscal and labour market reforms and measures to strengthen the capital base of the Spanish banks". It will be interesting to see the final terms but this bailout surely will not be the no-strings-attached request Spain had sought. Once again, this is the wrong approach. Bondholders should have been wiped out. Instead, Spanish taxpayers will be put on the hook for another hundred billion euros. If  another hundred billion euros is all it takes, I will be amazed. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Bailout Lite? There's Really No Such Thing; €30 Billion Needed? It's Now €100 Billion; Contagion of Economic Idiocy Posted: 09 Jun 2012 10:22 AM PDT A few days ago Spain was purportedly going to need another €30 billion to €70 billion to recapitalize Spanish banks. I suggested the amount would be at least triple that and it did not take long to do so. Yahoo! Finance reports Spanish bailout could reach 100 billion euros A bailout for Spain's teetering banks, once requested by Madrid, could amount to as much as 100 billion euros, two senior EU sources told Reuters on Saturday. Spain has not yet made a formal request for European aid but it could come during a conference call of euro zone finance ministers, the sources, who were both on an earlier call to discuss the technicalities of a rescue, said. "A decision on Spain will only be taken ... by the ministers (in a second call). Madrid has not officially asked for help yet," one of the officials said. "The statement will mention 100 billion euros as an upper limit." €100 Billion Upper Limit? Until When? When I said triple the reported amount, I meant triple the upper end of the reported amount. Bear in mind I am just guessing. However, history shows that I am more likely to be on the low end than the high end. As with Greece, every economic number from Spain is revised to the downside, month in and month out. For now, the EU economic wizards will likely concoct a number just under that alleged "upper limit". My best guess is €90 billion. Then within six months, possibly as soon as the money is handed over, more problems will surface, more meetings will take place, and still more money will be stolen from Spanish taxpayers and handed over to the banks and bondholders. Bailout Lite?  There is no such thing as a "bailout lite". Sure, they can ease conditions on Spain, but what kind of message does that send Greece with elections coming up on June 17. Moreover, the odds the Spanish economy starts recovering later this year as forecast are virtually zero percent. Then what? Then Spain will need another "bailout lite" and still more extensions. In the meantime, the odds France and Italy hit their budget deficit targets are also close to zero. Contagion of Economic Idiocy Combine the above ideas with the worst economic plan in history to combat high unemployment (please see Hollande About to Wreck France With Economically Insane Proposal: "Make Layoffs So Expensive For Companies That It's Not Worth It") and an economic disaster awaits the eurozone. My conclusion is that Europe is about to suffer from contagion of the worst kind: contagion of economic idiocy on bailouts, on employment, and nannycrat nonsense. The humorous quote of the day comes from "FamilyMan" who offers these thoughts on France's proposals to stem unemployment: As a US citizen, I applaud the French strategy. Since we can't fix America, we need other countries to be even more insane than we are! Can we get France to implement a $500 euro an hour minimum wage to "wipe out poverty"? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.