Spain is Approaching Insolvency

Is Spain Running Out Of Cash? | ZeroHedge.

This post rightly points out that Spain needs €40bn to roll over its debt between now and the end of the year. What this post doesn’t take into account is that the in addition to rolling over the debt, this year’s budget deficit is going to be much higher than the Spanish government, the troika or the mainstream media are letting on, which I wrote about last week:

A Spanish budget deficit of about 10% is in the cards for 2012, which implies another €50bn or so in additional financing for the rest of the year. The biggest customer for Spanish sovereign bonds is the Spanish banking system. The run on deposits means that the banks will not be able to purchase as many bonds as forecast just a one month ago.

Spain is effectively shut out of the debt markets for longer maturity bonds, so I bet that Spain sells nothing but short-term bills for the rest of the year in order to forestall a bailout request as along as possible. If this plan works, Spain will still have to request a bailout sometime next year.

One caveat to my analysis, with a full-scale bank run in progress, anything can happen now. Fire up the magic money machine, Super Mario, and get that checkbook out, Angie. They ate all the tapas and drank all the wine, but guess who’s getting stuck with the bill?

One thought on “Spain is Approaching Insolvency

  1. Interesting point re: Spain’s likely turn to short-term financing in order to forestall a full on bailout. And hasn’t the ECB since Draghi’s “whatever it takes” commitment been buying Spain’s 2-yr bills under the smokescreen of “convertibility” disparities it is legally mandated to intervene and lessen, whose effect has been to collapse Spain’s 2-yr yields?. ZH today also posted Spain’s 2y10y spread and noted its historic level, likewise indicating this spread’s widening presents a problem I don’t really get (other than it showing declining confidence in Spain’s ability to meet its long-term finance needs, which is no new news).

    Up to now crisis in the euro-zone periphery always has centered on 10-yr yields blowing out, making future sovereign refinancing needs potentially unmanageable, yet you raise a legitimate alternative in Spain’s tapping the 2-yr to meet its needs. I wonder why this alternative generally is not pursued. How can it be any more damaging to confidence than having to undergo a full on bailout, which itself is an admission that, long-term financing needs are unsustainable?

    It certainly seems some “market disrupting” alternative such as allows Spain to indefinitely avoid requesting a bailout might be in the works — something also unlikely to trigger the “black swan” event you have been writing about. One wonders, too, if this might be related to Merkel communicating to both Rajoy and Monti last week that, both Spain and Italy should delay any request for a bailout. Well, we’ll just have to wait for Draghi on Thursday to possibly shed more light on this. I wouldn’t be surprised if bailout junkies busy consolidating a supra-national banking dictatorship are bitterly disappointed, as their agenda plainly targets destruction of the ultimate authority resting in sovereign nation states. Still, being that Spain is a bigger fish to swallow, it would seem their bailout being credibly avoided might serve to shrink the 2y10y spread with “renewed confidence” (relatively speaking) restoring a bid on the long end.

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