We note the brief jubilation (at least it was so reported) as news of the Spanish "bail out" was broadcast to a quivering world. Alas, we believe that the markets' bounce and immediate relapse frames the picture perfectly. The market reaction was entirely predictable in direction if not magnitude, and savvy traders with the right electronic support had a good morning, but it was an in/out and cash the checks before anyone else caught on. As automated trading programs finished their work we saw volume and other fluctuations return to their jittery "normals" with no realistic proposition of solution. Wiser pundits pointed out that the Spanish "bailout" was no bailout at all, rather somewhat the inexplicable opening of an LOC to a gambler who had just lost his shirt, trousers, and shoes at the crap table. Fearing the imminent collapse of the whole "zone" the financial Eurowizards have opted to shovel yet another semi-load of fill into the ever-expanding sink hole. We are darkly amused to read media statements attributing market fluctuations to "fears" of this or that. These events are not shadows. They are real occurrences with real consequences. We have built ourselves a fancy meat grinding machine but have slipped over the safety rail into the chewing-chute. The wheels are turning.
What else could they do (i.e throw more good money after bad), the reader may ask? We offer some related articles for both background and current situational awareness.
From Time: Adding to the gloomy mood on Monday, the Fitch Ratings agency downgraded the credit rating of Spain’s two largest international banks Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA from A to BBB+. The agency said the reasons for the downgrade were primarily because Spanish credit rating was downgraded to two notches above junk last week, because of a fresh forecast that Spain’s faltering economy will remain in recession into 2013 “compared to the previous expectation that the economy would benefit from a mild recovery in 2013.”
From The Jakarta Globe - ordinary investors (bondholders) to be superceded by the loan repayments: It is also still unclear whether the eurozone bailout will tap the incoming bailout fund, the European Stability Mechanism (ESM), whose debt takes priority for repayment over ordinary investors in a time of crisis. Several analysts warned that a Spanish banking rescue using the ESM could have the unintended effect of scaring ordinary investors away from Spanish government bonds.
Spain sold bonds- so who bought them?
From SF Gate: The European Central Bank has done its job to buy time for governments to fix weaknesses in the euro's foundations, Bundesbank board member Andreas Dombret said. "To those who ask what else the euro system can do, I say that we have done our part, now it's up to the political leaders to deliver on the fiscal and structural policy side," Dombret said in an interview in London yesterday. The ECB bought Spanish and Italian government bonds last year, using its Securities Markets Program, to try to stop the debt crisis from spreading to the euro region's third- and fourth-biggest economies. The program was put on hold earlier this year after the central bank supplied 1 trillion euros of three-year loans to euro-area banks in December and February. Ten-year Dutch bond yields rose 14 basis points to 1.98 percent after the Netherlands sold 1.65 billion euros of securities maturing in January 2033. The government planned to sell as much as 2.5 billion euros of the debt.
From Business Week: “It’ll take a while to digest the Spanish news, especially as some of the details of that package are still to be specified,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “We have the looming Greek elections on Sunday, which are seen as a huge element of uncertainty.” Greece is scheduled to hold elections on June 17 after a previous vote last month failed to produce a viable governing majority.
And what's next?
From The New American: One of those seeing clearly is Gary Jenkins of Swordfish Research Ltd. in Amersham, England. In a note to his clients, Jenkins said: “While Spanish politicians tried to claim that this was not a bailout, it is of course a de-facto bailout of Spain.” There is little confidence that sending good money after bad will have any positive impact in Spain. Economists at Exane BNP Paribas said in comments to its customers that there is now even less of a chance that Spain will be able to pay back any of its enormous, and soon to be substantially larger, national debt:
No one believes that Spain can pay the "line of credit" back. What's next? More chaos, we suppose, as we recommend that individuals and families 1) get out of debt, 2) counsel together on what to do if the household has no employment, and 3) consider how basic stocks of food and clothing would benefit your situation and enable you to assist neighbors if necessary. Let's not allow the "normalcy bias" to paralyze us while the wolf pack is in clear sight. Or maybe things will somehow just get back to normal so we can all go on with our lives. Wouldn't that be great?