Spain is Greece… Only Bigger and Worse

Spain is Greece… Only Bigger and Worse

As I’ve outlined in earlier articles, Spain will be the straw that breaks the EU’s back. The country’s private Debt to GDP is above 300%. Spanish banks are loaded with toxic debts courtesy of a housing bubble that makes the US’s look like a small bump in comparison. And the Spanish government is bankrupt as well.

Indeed, in the last month alone we’ve seen:

1. Spain’s banking system saw a bank run to the tune of €70 billion in August. The market cap for all of Spain’s banks is just €114 billion. So Spanish banks need to raise at least €20+ billion or so per month in the coming months to stay afloat. This is without depositors pulling additional funds in September onwards. That’s really bad news.

2. Spain’s now nationalized Bankia just took another €5.4 billion from Spain’s in-country rescue fund. This indicates that once nationalized, problem banks DO NOT cease to be problems.

3. The region of Andalusia is requesting a bailout from the Spanish Federal Government. This comes on the heels of bailout requests from the regions of Valencia, Murcia and Catalonia (none of which want any “conditions” on the funds).

4. Spain has set aside €18 billion to bailout its regions. The current bailout requests already amount to €10.8 billion. That’s just from this year alone.

If you need more info on Spain, the bullet items from them that you need to know are that:

1. A huge portion of Spain’s banking system (representing over 50% of mortgage loans AND deposits) was totally unregulated up until just a few years ago.
2. Spanish banks were drawing €337 billion from the ECB on a monthly basis to fund their liquidity needs.
3. Every political figure and bank in Spain is HIGHLY incentivized to lie about the true nature of the Spanish banking system (a private text message from the Prime Minister claimed the REAL capital needs were closer to €500 billion… which is assuming he knows what he’s talking about/ the banks were honest with him… which I HIGHLY doubt).

Indeed, the markets are beginning to figure out the Spain is DONE regardless of what the ECB does. The truth is that Spain is in as bad a shape as Greece if not worse. Expect things to get very, very ugly soon.

The reason is two fold:

1. Spanish banks need to roll over (meaning renew terms on) more than 20% of their bonds this year.
2. Spanish sovereign bonds are collateral for hundreds of billions of Euros’ worth of trades.

With Spanish banks already under severe funding stress (again, they drew €337 billion from the ECB before the new OMT program… and depositors took €70 billion out of the system last month), they’re in no position to start paying out higher interest payments to bondholders.

And with investors realizing that Spain’s banks are all lying about the state of their balance sheets (remember, Bankia was talking about paying a dividend just one month before it collapsed and revised its €41 million 2011 profit to a €3.3 billion LOSS), we’re going to be seeing plenty of bank failures this year.

Remember, Spain’s initial request was for the EU to bail out its banks NOT the country itself. However, with some six Spanish regions (probably more) looking for bailouts Spain is now facing both a sovereign debt AND a banking crisis.

The timing of this issue will be difficult due to the ECB’s intervention, but at the end of the day, the math doesn’t add up. Spain has big problems and when the market figures out that the ECB cannot solve them… it’s going to be a very difficult time in Europe.

- Umesh Shanmugam