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alius terra in perturbo

Friday June 8th 2012

Spain has finally determined that its only course is to fall on its sword and seek emergency assistance. It will be the 4th nation to formally request financial aid (just beating Cyprus) whilst over the weekend the Euro Zone Finance Ministers hold talks to plot and prepare a package to attempt salvation for what has rapidly become the most dysfunctional national banking system in the Euro Zone.
 
ECB Vice President Vitor Constancio has announced that the region is awaiting the call from Spain so that a financial package can be developed that will be laser locked on the recapitalization of banks.
 
 
This underlines just how fragile is the mechanismby which the fly wheels of finance in...not just Spain but the wider Euro area are operating. There are so many spanners that could be thrown into the works across all nations. For example...
 
 
Why even Germany has an soft under belly... The terrible financial conditions of the Laender!
 
But Spain is the  current terra in perturbo as not only as the bond yields edging higher again, 6.216% at the close on Friday from 6.088% on Thursday. Driven higher by the fact that Fitch Ratings yesterday downgraded Spain to BBB. This is just 2 steps above non- investment grade. Pah...lets just say it "JUNK"
 
Fitch said the cost to the state of shoring up banks may amount to as much as EUR100Bn in the worst case, compared with its previous estimate of only EUR30 Bn. With unemployment over 24% and a dysfunction financial structure Spain is mired in recession for this year and next.
 
Standard & Poor's said on Thursday that it estimated the base-case  as having Spanish banks showing loan losses of between EUR80Bn to EUR112Bn in 2012 and 2013. Such numbers will blow a hole in the Spanish debt:GDP ratio's...in 2007 that stood at just 36% ... it will rise to 97% by 2015 if a loan of of EUR60Bn is taken. .
 
If the market perceives that Europe has tried to find a quick and cheap fix it will have none of it and Spanish yields that should never have gone to 6% yesterday will screech higher to 7% !
 
Given that PM Rajoy has already applied the most severe budget in terms of austerity since the return of democracy it is unreasonable to expect more to be applied right now. But if the package is too small and not armed with suitably stringent controls there will be no restoration of market confidence.
 
But herein lies the rub...if the Spanish banks are bad...what should we be making of Italian banks...or even French banks who thanks to Papin will not be able to slim their labour force to control their costs! 
 
What Europe hopes will be a soothing balm on the troubled market may actually agitate as questions about banking sanctity elsewhere come to the fore.
 
Enjoy your weekend, next week is going to be ugly.
 
Steve

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