Tuesday, May 4, 2010

Spanish Banks Spanked as Contagion Risks Spread

Obviously Portugal and Greece (aka Bear Stearns) are sideshows to the much larger Spain (aka Lehman). [I'll save a crisis in the UK or Japan as Fannie, Freddie]

Together the former 2 are not even 5% of Euro zone GDP whereas the latter is the 4th largest member and about 11% of GDP I believe. Truth be told, while Spain's economy is horrid (20% unemployment i.e. they have honest government reporting, an American style credit bust as "financial innovation" went wild, without the ability to print money at will to make it all "go away") its sovereign balance sheet is not nearly as horrid as Greece (or ironically, America's!). [Feb 5, 2010: Sovereign Risk Chart - Where Would the US Fit in, on Europe's Scale?] But again - printing money from thin air is a wonderful way to do partial, slow defaults ... the US, UK, and Japan are doing that. Spain cannot. Which makes me wonder if before all this is over the European Central Bank will get new powers that mimic the Fed because having your central banker print like mad and take government debt onto its balance sheet seems to be the only real solution in a world gone mad on kicking the can down the road. (sidenote - while the ECB is prohibited from directly buying government debt, it can do so in the secondary market... bu until now has not.)

Whatever the case - Portugal, which should have been next, is losing some attention as we're seeing Spain face attack. A couple of their major banks are looking like US banks circa 2008. Below we see Banco Santander (STD) and Banco Bilbao (BBVA)

Perhaps Spain needs to change some accounting rules, make a cute stress test (in which no one fails), hand the banks unlimited free money so they can make profit just by turning on the light, and tell the world the taxpayers of the country will bear every loss of the bank and thus the bank cannot fail? Outrageous? ... nah, it's the U.S. solution. But again it is all circular... that works fine and dandy when the taxpayer will bear the losses and you can print endless supplies of new money to offset said losses... Spain cannot.

Worst case scenario is the US taxpayer will bail out Spain via the IMF... "worked" for Greece. Or my own favorite nuclear option - the Fed can turn Spain (and Greece and Portugal) into 'bank holding companies'... that also "fixes" everything.*

*that can't really happen... or can it? ;)

Please turn your grandchildren upside down and shake out his/her pockets again - the Europeans need them ... thank you.

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Oh no, not again

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