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Monday, May 28, 2012 12:54 PM

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

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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
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