Though €100bn – the figure cited by European ministers, if not by Spain itself – was a far larger figure than initial reports suggested, many analysts believe that, with capitalflooding out of Spain, it will not be enough to prevent a full-blooded bailout of the government at a later date. Fixing the banks will help the vital task of preventing the entire European financial system from freezing up; but itwill do little for the Spanish economy, which is on its knees.
-UK Guardian

Ultimately financial market euphoria over a European bailout for Spain’s debt-stricken banks faded quickly yesterday as investors sounded the alarm over its impact on public debt and bondholders, and eyed the next crisis in the euro zone’s debt crisis.

Stocks slid and the euro fell against the US dollar, while Spain’s bond yields rose as investors worried about details of a $125 billion deal to shore up Spanish banks.

By the way, do you still recall the WARNING I gave you yesterday from Tyler Durden at www.zerohedge.com?: “Keep a close eye on Spanish sovereign bonds at the moment when the bond market understands what just happened, and once the euphoria over the very short-term bailout of insolvent Spanish banks passes. Because a month from today another €100 billion will be required, then another €100, and so on.”

Well, we certainly didn’t have to wait too long for that to happen, did we? As you can see on the chart below, Spanish (and also Italian) sovereign bond spreads literally exploded at 2:00 am Eastern, and the bond market has not looked back since. Therefore Tyler opines that “we are likely hours away from screams for the ECB to come and re-bail out a just bailed out Spain.”

Next to that, Spanish 5Y CDS broke back above 600bps (just shy of their record 603bps level) and Spanish 10Y yields are over 50bps wider/higher than their intraday lows just after the open in Europe. Italy also just broke 550bps.

Furthermore he added that Europe brings out the “capital controls” bazooka:

  • EU SOURCES HAVE DISCUSSED IMPOSING CAPITAL CONTROLS AS WORST CASE SCENARIO IF GREECE LEAVES EUROZONE – RTRS
  • IMPOSING BORDER CHECKS, LIMITING ATM WITHDRAWALS ALSO PART OF WORST-CASE SCENARIO PLANNING – EU SOURCES – RTRS
  • SUSPENSION OF SCHENGEN ALSO DISCUSSED

In other words, that money you thought you had … You don’t really have it. We can only hope this message was not meant to restore confidence and prevent future bank runs. Because if Europe wanted a continental bank run, it may have just gotten one.

“This is getting scary very fast.”

And finally he brings to our attention the fact that Spain’s real debt to GDP is actually 146.6% right now:

One can pretend that Spain’s officially reported debt/GDP ratio is 68.50%, or one can do a full breakdown of all liabilities, including contingent, and add the €100 billion bailout to the total, and get the following rather terrifying ratio: 146.6%.

Last Friday Mark Grant, author of Out of the Box, tried to clarify a few things about the Spanish banking bailout. It seems that many people are still feeling uncertain about the whole process of bailing out the banks in Spain, so he helped clearing up this matter in ‘From RISK ON To REALITY ON’:

Lately I have listened to many that seem somewhat confused about what Europe can and cannot do presently and so I thought I would take a moment this morning to set the table straight. First and foremost there is no ESM, it does not yet exist and so cannot be used to do anything. It may well come into existence somewhere between July-September but it is not yet in existence. The present stabilization fund, the EFSF, has depleted assets after the bailout of Greece, Ireland and Portugal and has nowhere near the capital that would be required to provide any real financial assistance to Spain. The EFSF also can only give money to sovereign nations and has no authority to give money to banks and while this could be changed it would have to go back to the national parliaments to get changed and it would take months to revise its charter which is something that has not even been started so the conjecture about using the EFSF to give money directly to the Spanish banks is just hopes and prayers based upon misinformation.

In fact, there is only one European institution that is already authorized to give money directly to banks and that is the European Central Bank but this is also a construct that is full of with difficulties. Yesterday Spain was downgraded three full notches by Fitch with a negative outlook which complicated matters. What is the ECB to do just hand some of the Spanish banks $125 billion which is more likely $350-400 billion in my estimation and to which banks; just some of the Spanish banks or all of the Spanish banks and who is to supervise the re-capitalization as the banks are supervised by the Spanish Central Bank and not the ECB and so the banking system in Spain would have to be totally re-organized and power ceded which would likely take months, if politically possible, and what would the other nations in Europe say if the ECB is to help the banks of just one country when they did nothing for Dexia (Belgium, France and Luxembourg) or the Irish banks and one could reasonably imagine screams all across the Continent.

Perhaps some novel solution is found but this is not the muddling along kind of thing at all. This is the changing of charters kind of thing, the changing of national banking regulations kind of thing; the ceding of power to Europe kind of thing and anyone who thinks that this can all be accomplished in a matter of days is out having tea with Cinderella’ fairy godmother. Yet equities have rallied and bond spreads stopped widening on just this kind of hope but I predict that this will all be short-lived because, on its face, it is irrational. There is nothing wrong with having hopes and prayers but to base investment decisions on irrational interventions of some Divine power where there is not even a door for the Divinity to enter is just poor judgment by this name or any other you may concoct. It is no longer a case of “Risk on/Risk off” but of “Reality on/Reality off” and I advise you to keep pressing the “Reality on” button!

I do hope these three paragraphs have given you a better understanding of what is currently going on in Europe, although I am pretty sure that still many questions remain unanswered. At least it should be very clear to everyone the situation is getting more and more precarious so I suggest you to prepare for (much) worse times ahead.

After reading ‘The “Solution” Is Collapse’ from Charles Hugh Smith at Of Two Minds below, you probably won’t be inclined again to think that something needs to be done – as soon as possible – to clean up the mess we’re in.

Even though it is quite a long article, I strongly suggest you to give it some careful thought. And if you feel it is a true eye-opener, maybe you should consider sending it to your local politicians:

The “Solution” Is Collapse

So the root problem is the system, human nature, blah blah blah. There are no “solutions” that can fix those defaults. Thus the “solution” is collapse.

Policies create incentives and disincentives. Some are intended, some fall into the category of unintended consequences. Regardless of their intention, policies that create windfalls (“easy money”) or open spigots of “free money” (or what is perceived as free money by the recipient) quickly gather the allegiance of everyone reaping the windfall or collecting the free money.

This allegiance is soon tempered into political steel by self-justification: humans excel at rationalizing their self-interest. Thus my share of the swag is soon “absolutely essential.”

Humans don’t need much incentive to pursue windfalls or free money – seeking windfalls in the here and now is our default setting. Taking the pulpit to denounce humanity’s innate greed, avarice and selfishness doesn’t change this, as seeking short-term windfalls has offered enormous selective advantages for hundreds of thousands of years.

That which is painful to those collecting free money will be avoided, and that which is easy will be pursued until it’s painful. Borrowing $1.5 trillion a year from toddlers and the unborn taxpayers of the future is easy and painless, as toddlers have no political power. So we will borrow from the powerless to fund our free money spigots until it becomes painful.

It won’t become painful to borrow from our grandkids for quite some time, and it will probably not become progressively painful, either, because we will suppress the pain with superlow interest rates and other trickery. The pain will more likely be of the sudden, unexpected, “this can’t be happening to me” heart-attack sort: the free-money machine will unexpectedly grind to a halt in some sort of easily predictable but always-in-the-future crisis.

“Solutions” that turn off the free money spigots are non-starters, not just from self-interest but from ideology. Any attempt to tighten the spigots steps on ideological toes, as each spigot is ideologically sacred to one political camp or another.

Liberals don’t want to hear about scamming of their sacred “we must help everyone in need” welfare programs, and conservatives don’t want to hear about cartel looting of their sacred “free enterprise” system.

And so we have gridlock, what I call profound political disunity. Everybody at each trough of free money fights tooth and nail to keep their spigot wide open, and so the “solution” is to borrow 10% of the nation’s output in “free money” every year until the free-money machine breaks down.

Each ideology worships their own version of cargo-cult economics: if we wave the dead chicken over the enchanted rocks while dancing the humba-humba, prosperity and abundance will magically return and we can “grow our way out of debt.”

We’re like a sprawling family bickering over the inheritance: we’ll keep arguing over who deserves what until the inheritance is gone. That will trigger one final outburst of finger-pointing, resentment and betrayal, and then we’ll go do something else to get by.

The “solution” is thus collapse. This model has been very effectively explored in ‘The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization’ by Thomas Homer-Dixon. The basic idea is that when the carrying costs of the society exceed its output, the whole contraption collapses.

The political adjunct to this systemic implosion is that the productive people just stop supporting the Status Quo because it’s become too burdensome. The calculus of self-interest shifts from supporting the bloated, marginal-return Status Quo to abandoning it.

So the root problem is the system, human nature, blah blah blah. There are no “solutions” that can fix those defaults. The “solution” is collapse, as only collapse will force everyone to go do something more sustainable to get by.

Until then, arguing about “solutions” is a sport to be enjoyed sparingly.

Exactly, the solution is collapse but no single policy-maker is voluntarily going to sign up for this, right? So just wait patiently and sit tight, until the market forces its will on them!

Oh ... and don’t worry, collapse doesn’t mean the world is going to change into something resembling Mad Max or Armageddon. It will only end the current unsustainable monetary system and replace it with something different, which should be more stable than the one before.

And just to cheer you up a bit after all these depressing comments about the debt crisis in the developed countries, here is Eurosis for Dummies:

Where does the money for the bailouts come from?
All the governments in Europe including Greece, Italy, and Spain.

And who is allowed to receive money from it?
All the governments in Europe including Greece, Italy, and Spain.

How can that possibly work?
It can’t, but Europeans like bad ideas that sound nice!

Posted by Nico Omer Jonckheere | VP Research and Analysis, PT. Valbury Asia Futures