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Ad Hoc Commentary

Monday June 11th 2012

Monday, June 11th 2012
"...If Stupidity got us into this mess, then why can't it get us out? ...
Will Rogers
If one were to look at the green on the equity screen, one would have assume that all was well in the land of the Euro. How pleasant it must be to stroll along in the pleasant green uplands of European equities on this fine June morning. The markets are in hue copying the colour of the football pitched in Poland and Ukraine, as against the clay courts of Paris.
It is wonderful to see that Spain has received a nod and a wink that it be the recipient of up to EUR100Bn so as to save the banking system. Certainly we see euphoria in the Spanish banking sector as Santander and BBVA have leapt ahead. Some say that the past 48 hours have been a great weekend for the banks as the risk of a domestic lender unravelling have been reduced.
Some questions if we may?
Far from jumping for "Ra"joy the markets have to scrutinise this situation with the greatest intensity. Once Bankia is glued back together Spain will need to deal with CatlunyaCaixa and NovaGalicia. They say they need EUR9Bn...but that is their estimate...not a figure to take on trust.
Let's be absolutely clear...THIS IS A BAILOUT...it matters not a jot if the funds goes  to Fondo de reestructuración ordenada bancaria (FROB), in English known as Fund for Orderly Bank Restructuring (FOBR).
Under the provisions of Article 114 of Law 47/2003 , General Budget, authorizing the Central Government to provide guarantees to guarantee the financial obligations required of the FROB
Do we take this to mean that the Spanish Government is responsible for ensuring the loan is repaid. If it is Government Guaranteed, should we not be counting this as a Government Debt Obligation?
Circulation of Money?
Europe lends EUR100Bn to FROB, Lends EUR100Bn to the banks and caja,   After reorganisation, excess capital invested in SGB's!!!!            Nice one Señor
The problems of Spain are actually much deeper than the banking system as the regions themselves are in dire budgetary condition and the time lag from cleansing a bank to seeing lending liquidly flowing again is at leat 9 months and in this case probably closer to 12. 
Of course one could say that PM Rajoy woke up just in time and realised the difficulties facing the nation and so did what he needed to do on behalf if the nation. However, that does not excuse the recent past ...at best delusion .. at worst deception,  that Spain could go it alone. It never could and now the matter of bringing the level of Debt:GDP down to 5.3% this year is totally unrealistic.
When Spain fails to meet its targets, and does not return to growth next year what will the reaction be in the markets? Like an Armada, capital and investors will leave Spain shores.
This is just to start the week:
Looking ahead, question are already asked about the Italian banking system. In France, Hollande may soon control the assembly but far from reform the labour market Michel Sapin is making it impossible to cut headcount! So we look forward to a summer of Franco German confrontation! But of course the big firecracker in the box which we are saving for next Sunday is Greece. Whoever gets to frame a coalition, if that is possible, will need too reassess the March terms of the EUR130Bn bailout.
Fasten your seatbelts!

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