Now I’ve Seen It All (Spain)

Now this is creative — and destructive.

Spain is considering using debt issued by the government or its bank-rescue fund instead of cash into the Bankia group, using a mechanism that would free it from raising the money from investors.

The government hasn’t made a decision on whether to use its debt to recapitalize the nationalized lender and will decide in two or three months, a spokesman for the Economy Ministry, who asked not to be named in line with its policy, said in a phone interview today. Prime Minister Mariano Rajoy said at a Madrid news conference today the government hadn’t spoken to theEuropean Central Bank about such a step.

Debt, of course, is not cash.   It does “improve” a bank’s asset-to-liability ratio.

Well, in theory anyway — note the quotes.


Because the improvement assumes that the debt you put into the bank (“gifted”, if you will, although in this case it’s in exchange for ownership!) is money good.

If it’s not then the paradox is that it will make the situation worse!

Spain has a “wee problem” in this regard in that their government bond yields are going higher.  Bond values trade as an inverse of yield. This is likely to drive the yields higher still, and values lower still.  The key is whether this continues once the capitalization move is made; if it does, then the rot gets much worse in a big hurry.

In short this is an outright scam to avoid forcing the liquidation of the bad debt and recognition of the losses that have already happened.  It is exactly what Paulson .et.al. were doing with TARP and the rest of the mess here in America — we “gave” the banks enough capital to make them “look” good then we changed the law so they could lie in perpetuity about the “value” of their “assets” and until and unless someone forced them to actually pay (e.g. at maturity) they could get away with it.

Let’s assume for a moment that instead of these bank scams we instead had the federal government literally counterfeit $100 bills and mail them to people.  Remember, The Federal Reserve is the one who directs the printing of currency at the BEP, so we’ll assume there’s another little shop off the West Wing that has a clandestine printing outfit in it.

But these bills are a bit defective, you see — they aren’t official BEP emissions and the point is to put them into the system without anyone knowing.  So what we would do at the same time is pass laws that make the examination standards for “real money” less and less stringent, so the fakes the White House emitted would pass!

That’s what was done in 2009 here in the United States with the FASB threats and it’s what’s being done now in Spain.  Rather than force the bad debt into the open, default it, accept the credit contraction that comes with it and clear the slate, making way for actual economic progress, we are instead continuing to shove the old, rotting fish further under the carpet, using up cans of air freshener by the case and praying that nobody notices the maggots.

It’s all a scam and we are reaching the point where this entire mess will go prompt critical.  As Spanish bond yields continue to blow out the market will force discipline.  Oh sure, there will be those who think Germany will “blink”, but let’s not forget that Germanycan’t, on a sustainable forward basis, carry the entire Euro zone.

Nor should it try.

This is no small gambit either — the Bankia “rescue” is approximately 1/3rd of Spanish GDP.  To presume that this will not in any meaningful way impact the Spanish budget deficit is a howler of unprecedented proportion, and using existing government bonds rather than selling new debt to raise the money is an admission that Spain knows they can’t raise the funds in the market on commercially-reasonable terms.

Expect the market to lean into this admission shortly; the odds have just gone up materially that while Greece may be the trigger, it is Spain that will provide the “main charge” for the detonation over in Europe.

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