Forget Today's Bond Auction, Spain Is An Absolute Disaster
Graham SummersWell the financial world is awash with reports that the Spanish auctions went well. They did not. And you better believe the ECB and other Central Banks were involved in the buying.
19 April 2012
Instead, Wall Street is using the auction (and just about every other announcement this morning) to shred and those who sold calls in their usual options expiration games. This has been the norm for years, but the mainstream financial media continues to find "fundamental" excuses for market action that is clearly just manipulation and nothing more.
Case in point, if the Spanish auction went so well, why are Spanish Credit Default Swaps widening? Ditto for Spanish yields (the ten year is back closing in on 6%)?
However, ultimately this auction means next to nothing. Spain is an absolute disaster on a level that few if any analysts can even grasp.
How else do you describe a country for which:
- Total Spanish banking loans are equal to 170% of Spanish GDP.
- Total Spanish private sector debt is near 300% of GDP.
- Troubled loans at Spanish Banks just hit an 18-year high of over 8%.
- Spanish Banks are drawing a record €316.3 billion from the ECB (up from €169.2 billion in February).
By the way, Spanish banks need to roll over 20% of their bonds this year too. Good luck with that. I'm sure it will all work out well. After all, the ECB and IMF have the funds to prop up Spain's €1 trillion economy.
Oh wait, they don't. In fact no one does. The IMF's requests for more funds have been rejected by both the US and Canada (you really think Obama will fund a European bailout during an election year?). And the ECB has already blown up its balance sheet to the point that Germany and the ECB are growing hostile to each other (I'm sure this will work out well too).
Forget today's auction and the spin being thrown about. Spain is a disaster. Its banking system is a sewer of toxic debts which the Spanish Government has attempted to fix by either merging insolvent banks together or spreading toxic garbage onto the public's balance sheet.
This might fly in the US (or has least has so far) where the economy is more robust and diversified than in Spain. But for a country whose housing bubble dwarfed that of the US and which is already posting unemployment of 24% (the highest in the industrialized world) and youth unemployment of 50%+, it's a tough sell.
Oh, and Spain's King decided to take time off from hearing about the Crisis to go elephant hunting. That should go over well with the Spanish populace, which is now facing austerity measures when the country is already in a Depression thanks to debt saturation on a corporate and household level.
Consider the following:
- Spanish non-financial corporations' gross debts outstanding are equal to 196% of Spain's GDP (this is worse than that of Greece, Portugal, even Japan)
- Spanish non-financial corporations sport debt to equity ratios of 152% (only Greece and Japan are worse here)
- Spanish household debt is equal to 90% of the country's GDP: much higher than the EU average of 70% and roughly inline with that of the US which has been running a credit bubble for 30+ years.
This final data point is key to Spain's understanding economic woes. Aside from the fact that Spain's housing bust meant millions of people losing their jobs, most Spanish loans are recourse loans, meaning the banks can come after your assets (house, car, etc.) as well as your posted collateral should you fail to make your debt payments.
Thus, the Spanish banking system literally has a chokehold on the Spanish economy. In bullet form:
- Spanish banks are insolvent due to the housing bust and so cannot make new loans to would-be entrepreneurs or homeowners.
- Spanish households are cutting spending dramatically as they try to pay off their debts and avoid losing their homes/ other assets.
However, in the end, the entire Spanish banking system is garbage. As far back as mid-2010 the Spanish Central Bank estimated that troubled loan exposure for Spanish banks was €180 billion. They just announced that nearly one in ten Euros in loans on bank balance sheets are garbage.
Just wait, once options expiration ends, we'll be back to the fireworks. In fact, smart investors should take advantage of this ramp job to prepare for what's coming.
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