Spain Bank 'Bail-out' - Dream On!

Why Read: Because what happened Saturday in the Eurozone (and Spain in particular) had to happen, and because what happened has wide-ranging implications.

Featured Articles: Many articles on Saturday afternoon and Sunday adopted the word ' bailout' in their headlines - as in "Eurozone finance ministers agree to 100 billion euro Spain bailout". Others more correctly from a technical point of view have reported headlines such as 'Spain gets money, but no 'bailout'. Without doubt you have watched, listened to, and read this reported 'ad nauseam' since about noon-time Eastern Time on Saturday.

Commentary: A number of things are important:

• 100 billion euros is not 'chump change'. To put 100 billion euros (about U.S.$125 billion) in perspective:
  
  • Canada's population is about 35 million, about 70% of Spain's population,
    
  • Canada, which is far from sovereign debt free, suffered a 2011-12 Federal Government deficit of Cdn$23.5 billion (about 1/5th of 100 billion euros) in its fiscal year ended March 31, 2012, and
    
  • that is for an entire country, where Canadians would be apoplectic if it was announced the Canadian banking system needed a bailout;
    
• technically, what the Eurozone finance ministers agreed to on June 9 was to advance 'up to' 100 billion euros to Spain's banks, not to Spain itself;
  
• an important question is: As a practical matter is this really nothing but semantics? Subsidizing Spain's banks is simply an in indirect subsidization of Spain's economy, and hence Spain itself - just as America's subsidization of its banks and finance businesses since 2008 has been a subsidization America's economy;
  
• a second important question is: Why will this money be advanced without enforceable assurances that the Spanish government will give strong guarantees austerity measures are introduced? This means the Spanish bank bailout is just 'more of the same push down the road', and makes little sense in a commercial context unless one accepts a 'no austerity program in exchange for hoped-for GDP growth scenario';
  
• in the world's current 'developed country' economic circumstances, and with particular reference to the Eurozone, a 'no austerity program in exchange for hoped-for GDP growth scenario' is one that might be compared with a group of people sitting around a campfire on a very cold winter night:
  
  • in the middle of a plain devoid of trees,
    
  • feeding late fall grass found under the snow into the fire to keep it burning, albeit with a low 'input to heat output' ratio, all
    
  • while waiting for trees that are only one foot high to grow.
    
• no final amount of subsidization will be established until the Spain bank audits now underway are completed, and more definitive amounts of required subsidization are better known. This is expected sometime after the Greek general election to be held on June 17;
  
• interestingly, some reports suggest the urgency in having the Eurozone finance ministers meet and 'agree on something' on June 9 was related to the fact of the June 17 Greek election, suggesting it was important to take some of the 'Spanish uncertainty' out of the financial markets in advance of the Greek elections;
  
• Spanish bank capital requirements, beginning with the Bankia SA (Spain's 4th largest bank with about 10% of Spain's bank deposits), first came into the spotlight just one month ago . Since then, it has become ever more apparent that neither Spain nor anyone else currently knows the true extent of what ultimately will be the Spanish bank capital shortfalls. Don't be surprised if the numbers prove to be more than 100 billion euros;
  
• importantly, any 'bailout' of Spain's banks will be but a 'catch-up' and intermediary step in creating economic stability for Spain. As such, it will not solve Spain's current economic problems nor is it likely to result in significant GDP growth for Spain. GDP growth is crucial to Spain getting 'back on side' economically; and,
  
• some are now allegedly expressing view that Italy may be next. Certainly Italy's debt:GDP ratio currently is higher than Spain's. Watch closely for developments in Italy over the next few months.