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June 9, 2012

Spain Bailout Disaster Explained

Spain is going to ask for a bailout this weekend and what will happen in the next weeks is open to much speculation, the nightmare of a contagion to a major Euro economy has happened and any possible amount set aside from the Euro funds will fall short for the now escalating Spanish crisis.

Let us check some figures on the Spanish mess:

  • Total Spanish banking loans are equal to 170% of Spanish GDP.
  • Troubled loans at Spanish Banks just hit an 18-year high.
  • Spanish Banks are drawing a record €316.3 billion from the ECB (up from €169.2 billion in February).
  • Spanish citizens are pulling their money out of Spain en masse: over €100 billion left the Spanish banking system in 2012 alone.
  • Over HALF of all Spanish mortgages are owned by Spanish cajas.

Spain's housing bubble is the dark blue line below. The US is the gray one.

Cajas primary lending market during Spain's housing boom were subprime and sub-sub prime borrowers.
The entire Spanish banking system is saturated with toxic mortgage debt on a level that makes the US in 2008 looks like a minor incident.

In response to this Spain has just performed the largest bank nationalization in its history: Bankia.

Here’s a brief summary:

Bankia was formed in 2010 when the Spanish Government merged seven insolvent cajas. In plain terms, Bankia was a trainwreck waiting to happen.
However, both the bank itself and the Spanish Government decided to maintain a charade that the bank was in great form right up until it collapsed (only one month ago Bankia was talking about paying its dividend).
On May 9th the Spanish Government stepped in to nationalize the bank. Its first step was to convert its (the Spanish Government’s) €4.5 billion worth of preferred shares to common shares, thereby taking a 45% stake in the bank.

The Spanish Government assured everyone that this move was adequate and that Bankia was solvent. Then Bankia announces €17 billion of new write-downs as well as €7 billion of mark-downs on investments. It also revised its 2011 results from a €309 million profit to a €3 billion LOSS.

It is true though that all major banks in the Western world are engaging in similar accounting practices to hide the true conditions of their balance sheets.

In Bankia’s case all of this culminated in the bank receiving a €19 billion Euro bailout, the largest in Spain’s history. And for certain this amount of money will be increased dramatically: Bankia’s loan book is roughly €200 billion in size (1/5th the size of Spain’s GDP) and a major chunk of this is most probably garbage.

The real problem though is that Spain itself is broke and doesn’t have the money to bailout Bankia.

The Spanish stock market has been in a free fall for most of 2012 as Spain's banking system teeters on the brink of collapse.


If we look at Spain's LONG-TERM chart where the market has just broken a 15 YEAR TRENDLINE we are set for disaster.

I believe we have at most a month before Spain drags down other countries. The Spanish economy and banking system are too large to be bailed out and the IMF and ECB know this.

Moreover, worldwide banking exposure to Spain is well over €1 TRILLION.

EU banking system is leveraged at 26 to 1 (Lehman Brothers was leveraged at 30 to 1 when it collapsed).

Troubled times ahead for Europe.

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