BLIND MAN’S BLUFF?

In prior posts, I have questioned the sustainability of the EuroZone. At the same time, I have questioned whether European Banks have sufficient Equity Capital in the event of another significant recession. And, I have pointed-out that the troubles in Spain are much more important than those in Greece; because, Spain is the third largest Economy in The Zone–the countries sharing the common currency–while Greece is much smaller.

Well today, Spain sold more debt–as much as it wanted–but, at an interest rate of 6.04% for 10-year bonds, higher than the 5.74% at the last auction in April. At the same time, Fitch ( a major credit rating agency) lowered Spain’s debt rating, by three full notches, to BBB. It is now on the brink of being declared “Junk Bonds” if it falls much farther. For a point-of-reference, 10-year UK bonds are yielding only 1.72% and those of Germany are at 1.37%.

As you might understand, anyone who had any sense, has already moved their money out of Spain. The ATMs have been humming. Well, guess who bought most of the Spanish Debt that was sold today? It was the Spanish Banks. As the linked article from The New York Times notes, http://www.nytimes.com/2012/06/08/business/global/madrid-leans-on-its-troubled-banks-for-financing.html?hp, this appears to be a vicious circle.

Back in 2009, as the World was recovering from The Great Recession (2007-2009), many US Banks raised additional Equity Capital. Many European Banks, however, did not. The “common belief” was that the various countries would bail-out their Nation’s banks.

So, what will the impact be when you have failing banks, with insufficient capital, buying the debt of a Country, that supposedly will “bail it out”, and whose debt has been down-graded to the brink of “Junk”? That means that the value of the bonds that the Spanish Banks are buying is dropping in value–further depleting their capital base.

What will be the final impact on the EuroZone be? After Greece and Spain, which country will be next–Portugal, Italy or another? Initially, the ECB (European Central Bank), which manages Monetary Policy for The seventeen country Zone, believed they were looking at sixteen countries bailing-out one. Well, if we assume that Recession could impact the EuroZone, and perhaps, more Banks–and Countries–are undercapitalized, who or what will be the Savior? Remember, this debacle has been going on for 28 months!

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  1. #1 by maxcat07 on June 9, 2012 - 2:14 PM

    So, if I understand this right, when Spain defaults on THESE debts, which they’re most likely going to, they’ll just sell themselves more bonds, right?

    • #2 by cheekos on June 16, 2012 - 7:23 PM

      Remember the old Twilight Zone? So far, that has been The EuroZone.

  2. #3 by Catalina on June 10, 2012 - 2:49 AM

    Germany, France, Italy, Spain. Spain is the 4th not 3rd largest economy.

    • #4 by cheekos on June 16, 2012 - 7:20 PM

      Catalina, you are so right. I noticed that while writing yesterday’s Post. Yes, Italy is the Third Largest and Spain is Fourth.

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