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The ESM will be the vortex which swallows Europe (if ratified)

Today it emerged that the ESM (European Stability Mechanism) could later be paying for the €100 billion bailout of Spain’s banking system. This ‘stability’ mechanism, however, has only been ratified by France, Holland and Slovenia – and may never materialise.

The video below is targeted at a German audience, but is still relevant to any European.

That ESM which everybody may think is a cuddly solution to the problem, is in fact a huge Orwellian nightmare. Nobody will be able to sue it or any of its officials, whilst they will have carte blanche to act above the law. Unelected overlord Eurosprouts will be able to impose their will over Europe and have the right to ask for any money from governments, whenever they like, within 7 days. Given such stringent conditions, it is difficult to see why any sovereign nation would want to participate and ratify the proposals. Please correct me if I am wrong (and I suspect I am) but it seems only 3 countries have ratified it so far, and I think it is likely that the pledges for the ESM will never really come to light.

Moreover, any bailout in Europe is also subject to the risks of contagious circular logic. The Eurozone’s members have to stump up the cash to pay into the ESM. But if anyone needs a proper bailout,  Italy stumps up 17.9%, Spain 11.9%, and France 20.4%, of the ESM’s funding. But I have some questions.

A) How is Spain going to be able to afford to fund a bailout to itself, when it inevitably needs one?
B) By paying up for Spain, surely Italy will be pushed over the edge and will need a bailout. How will Spain be able to afford to fund that, given that it has just been bailed out?
C) Then doesn’t this put ‘safer countries’ like France and Germany at risk? If this jiggery-pokery continues with the ESM, they may very well need a bailout themselves – although I don’t see the Euro lasting that long.

To conclude, sovereign bailouts are throwing money down the drain. The ESM is only going strengthen contagion fears because it spreads out the risk amongst already fragile public finances. Therefore if the ESM does get signed into national statute books, it will make Europe far from stable and will be the sinkhole that swallows it up.

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Posted by on June 11, 2012 in Trading Ideas

 

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The Spanish bailout that will only make the EU more fragile

No lasting joy forecast for Rajoy

The markets are likely to hurrah this morning as news of the Spanish bailout is celebrated. Spain’s banks have been given a €100 billion bailout from the EU and the headline could easily be interpreted as good news. The reality, however, is that this bailout is incomplete, unratified and unpopular.

Furthermore Spain’s bank bailout has been largely free of conditions – unlike the bailouts of Greece, Portugal and Ireland, they will not have to suffer enforced austerity. This strengthens the hand of parties like Syriza in Greece who want to get rid of austerity – let’s not forget they are Greek elections on Sunday. Therefore, this bailout makes the EU and the Euro project even more fragile as the risk of sovereign default and eurozone exits becomes more real.

Firstly the EU is yet to specify which bailout fund will pay for Spain’s banks. Will it be the EFSF (European Financial Stability Fund) or the ESM (European Stability Fund) which is not yet signed into law? If it is the EFSF – there are legal issues surrounding it. Money was paid into the fund by Eurozone members on the premise that it would only be used for sovereign bailouts, not bank recapitalisations. There is pressure from Holland and Finland, not to mention other states, who want to vote against the bailout before it is agreed.

Secondly, Spain technically has to backstop the loans to it’s banks. Many economists believe that the tipping point where a nation can no longer pay back its debts is when the debt/GDP ratio is over 90%. Now with this bailout equivalent to 10% of Spain’s GDP, Spain is pushed over that level and onto the path to insolvency. Moreover, this Spanish federal debt does not include that of its regions – which adds another 13% onto it’s debt/GDP ratio.

One last bugbear that the markets seem to be forgetting is that Spain’s bailout is without many conditions. Unlike the bailouts of it’s other European members, there is no harsh austerity requirements attached. As Greeks go to the polls once again on Sunday – I would not be surprised if they give a mandate to Syriza to rule because of their unjust treatment. With Syriza in charge, the austerity package would be in ripped apart, Greece would be truly insolvent and would not be repaying the EU’s bailout. Long term, this means exiting the Euro, short-term they are likely to be subsidised by Germany. But how long would the Germans be prepared to put up with that? Then what about when Spain needs a bigger bailout? Or Italy needs one? They are too big to fail and too big to bail. Although we are now veering into the realm of the hypothetical – I would imagine this could set the precedent for Spain and Italy to leave the Euro.

Even if that doesn’t materialise soon, it is impossible to see how this bailout solves the Eurozone crisis. I am shorting the FTSE now in out of hours trading at 5560 with a stop loss at 5660. Once the bailout mania disappears, I think we will see the markets realise the dismal fate of the Eurozone once again and they will fall.

 
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Posted by on June 11, 2012 in Trading Ideas

 

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