Spanish 10-Year Bond Yield Hits 6.5%, Spread to Germany Hits Record; Prime Minister Repeats Lie "Spain Does Not Need Bailout"; Backdoor Bailout or Ponzi Scheme? More Questions Than Answers

In the wake of Bankia bailouts to the tune of €19 billion, the second bailout in two weeks, yields of Spanish debt are soaring.



Spread to German Bonds Hits 5.05 Percentage Points

At this rate I expect it will take less than a week before Prime Minister Mariano Rajoy changes his mind about not needing a bailout, but for now please consider another candidate for understatement of the month: Spain funding situation 'very difficult', PM Rajoy says

Spain's prime minister has said it is "very difficult" for the country to get funds.

The premium investors demanded for holding Spain's 10-year bonds over its German equivalent rose to a record 5.05 percentage points.

But Mr Rajoy said the banking system did not need an international bailout.

"There will not be any [European] rescue for the Spanish banking system," he said, but he backed calls for the European rescue fund to be able to lend to banks directly.

Last week Bankia, which was formed from the merger of several struggling regional lenders, requested a 19bn-euro bailout, which was a much bigger amount of help than had been expected.

"We took the bull by the horns because the alternative was collapse," said Prime Minister Mariano Rajoy, adding that Bankia customers' savings were now safer than ever.

Rather than borrowing money on the open markets, potentially at high cost, there are reports that Madrid is considering giving Bankia government bonds. The bank would then use them as collateral for loans from the European Central Bank.

One analyst said this would amount to "an ECB bailout through the back door".

Some are concerned that by doing this, the government is not tackling the problem of the huge amount of bad property loans, estimated at 32bn euros, that Bankia is holding.

"It is not dealing with the problem of bad loans, it is just keeping them going," said Kathleen Brooks, research director at Forex.com. "It risks becoming a zombie bank," she told BBC News.

Backdoor Bailout or Ponzi Scheme?

Is Rajoy's proposal a backdoor bailout or a Ponzi Scheme?

I proposed the latter yesterday morning in Spain's Plans to Recapitalize Bankia Will Put Germany, ECB at Risk; When Does the Ponzi Scheme Collapse?

More Questions Than Answers
 
One thing that will change Rajoy's tune in a hurry is if the ECB says no to the preposterous plan.

Then what?

What kind of interest rate can Spain get on the open market for bonds?

Doesn't the idea of recapitalization with junk bonds seem absurd enough in the first place?

I asked the key question yesterday: When does Germany say it has had enough of these preposterous schemes?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Spain's Plans to Recapitalize Bankia Will Put Germany, ECB at Risk; When Does the Ponzi Scheme Collapse?

Inquiring minds are interested in the recapitalization plans for the Bankia. Please consider this chain of posts.

ABC News reports Spain's Bankia set for massive bailout.

Spain's fourth-biggest bank Bankia says it is certain of securing the 19 billion euros ($24 billion) in state aid it is seeking in the largest bank bailout in the country's history.

Bankia is considered key to the country's financial system, and a failure would contaminate the entire banking sector.

The plight of Bankia - which holds some 10 per cent of the nation's bank deposits - has added to the concerns over the massive debt crisis gripping Spain and the rest of the eurozone.

Bankia president Jose Ignacio Goirigolzarri has sought to reassure investors and the public about the future of the struggling bank at a press conference called the day after it announced huge losses, and asked for a government rescue.

"I am certain that the Spanish state will obtain the financing so we will receive the 19 billion euros. That's the commitment," said Mr Goirigolzarri, adding that he expected to get the funds in July.

Devil in the Details

Inquiring minds just may be asking "Just where is this money coming from?" That's a good question.

Reuters reports Spain may recapitalize Bankia with government debt.

Spain may recapitalize Bankia with Spanish government bonds in return for shares in the bank which last week asked for rescue funding of 19 billion euros ($24 billion), a government source said on Sunday.

Bankia could use the sovereign paper as collateral to get cash from the European Central Bank, forcing the ECB to get involved with restructuring Spain's banking sector, laid low by lending to property developers in a boom that ended in 2008.

ECB policymakers, who have pumped over 1 trillion euros into Europe's financial system in recent months, are resisting pressure to do more to shore up the euro zone.

"The biggest problem here is that the ECB could object. That's a legal issue, but technically it is possible," said Jose Carlos Diez, economist at Intermoney Valores.

Ponzi Financing

Got That? A Spanish government source says the plan is to float what amounts to junk bonds, pawn them off to the ECB and use the proceeds to "recapitalize" Bankia.

Of course the ECB (bankrolled by Germany) is at enormous risk were this preposterous scheme to actually happen.

This is what I want to know: When does Germany say it has had enough of these preposterous schemes?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Greece Public Finances Face Collapse as Money Stuffed in Mattresses; Swiss Eye Capital Controls as Money Pours into Switzerland; Understatement of the Month

Lucas Papademos, the ex-technocrat prime minister of Greece says public finances face collapse.

Greece’s public finances could collapse as early as next month, leaving salaries and pensions unpaid unless a stable government emerges from the June 17 election, according to Lucas Papademos, the technocrat prime minister who left office after this month’s inconclusive vote.

Mr Papademos warned that conditions were deteriorating faster than expected with cash flow likely to turn negative in early June amid a sharp fall in tax revenues and a loosening of spending controls during two back-to-back election campaigns.

Mounting anxiety that Greece is headed for further political instability and a possible exit from the euro has prompted many Greeks to postpone making tax payments, and has also accelerated outflows of deposits from local banks.

Athens bankers estimate that more than €3bn of cash withdrawn since the May 6 election has been stashed in safe-deposit boxes and under mattresses in case the country is forced to readopt the drachma.

The finance ministry has halted repayment of value-added tax to Greek exporters, and slashed public investment spending by more than 20 per cent in the first four months.

Transfers to the health ministry to pay debts owed to hospital suppliers and pharmacies have been temporarily suspended, obliging patients to pay the full cost of prescription drugs for the first time.

The struggling state electricity utility PPC has received a €250m special payment from the budget to help cover a widening deficit. The utility has been hit by a sharp rise in non-payments of household electricity bills after the finance ministry imposed an extra “solidarity tax” last year that was added to the bills.

Understatement of the Month

“The situation is getting out of hand,” said a private sector economist. Really? It seems to me things got out of hand long ago.

Swiss Eye Capital Controls as Money Pours into Switzerland

While some stuff money in mattresses, others pour money into Swiss Francs. In response Swiss eye capital controls.

The Swiss National Bank is considering imposing capital controls on foreign deposits if Greece leaves the euro, as the franc comes under heavy demand from investors seeking a haven in Europe.

The Swiss franc has come under increasing pressure since the Greek elections at the start of the month. Currency traders have reported unusually high levels of franc buying in response to the problems in the eurozone, which has seen the euro slide to its lowest level in nearly two years.

“We’re preparing ourselves for turbulent times,” Mr Thomas Jordan [head of the Swiss central bank] said in an interview with SonntagsZeitung, a Swiss newspaper.

“The situation has become worse in the past few weeks and the outlook has become much more uncertain. We’re seeing a clear upward pressure on the franc,” he told the newspaper. “Investors are looking for a safe haven. For many, that includes the franc.”

I have said this before numerous times but it is worth repeating: If you have money in Greek, Spanish, or Portuguese banks, get it out now.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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