The riddle is not if Spain will request a bailout but when it will do so. Ignore all of the europhoria and political machinations and pay attention to the math. Spain just reported that its banks have €172bn in bad loans and they have experienced €224bn in deposit flight year to date. Furthermore, the government needs at least €86bn to finance its deficit and maturing debt by the end of 2012.
These numbers indicate a vast funding hole in Spain, but the picture is actually more grim than what the mainstream media is reporting.
During a banking crisis, bad loans are always under-reported by the banks. Remember that during the American subprime crisis all of the banks kept increasing their bad loan provisions. You can double the number above to €340bn and still be conservative.
Spain is also claiming €224bn in deposit flight from its banks, but the number is certainly higher. As of September 10, Spain’s Target2 liability was the highest in the eurozone, €415bn. This number more accurately reflects the hole in the balance sheet caused by deposit flight of all kinds.
I have been saying that the Spanish government’s fiscal condition is much worse than anyone is letting on. I researched Spain’s bond sales, its maturing debt and estimated its budget deficit based on its own projections. My work is here:
Based on a conservative budget deficit of 8.1% of GDP, Spain needs €86bn to finance itself for the rest of the year. If Spain follows the trajectory of the other austerity nations, then tax revenues have dropped more than they are projecting. Based on the situations in Greece, Ireland and Portugal, a 10% deficit is probably more accurate. This means that Spain will need €130bn to finance itself this year.
Adding these numbers together, 340 + 415 + 130 = 845, gives us the amount this bailout will cost initially. Remember another rule from the Eurocrisis: the cost of the bailout always rises due to austerity.
Now, Europe does not have this much money, so don’t expect Spain to receive a €845bn package. The troika will make fantastic projections of all of these cost inputs to get the package down to a number that it can afford, just like they did in Greece. Then, Spain will continue its depression indefinitely while it struggles to rebuild during austerity hamstrung by all of this debt.
While it is obvious to anyone doing the math that Spain must request a bailout, it has the ability to delay the inevitable for quite some time. The ECB is allowing the Bank of Spain to accept practically anything from Spanish banks in exchange for loans under the ELA. This means that the banks can stay afloat for a few more months until their collateral runs out.
These same banks are also the best (and perhaps only) customers for Spanish debt. As long as they are alive, they will continue financing the Spanish government by buying up all of the debt auctions. The government and the banks are like two drunks holding each other up as they stumble home.
Rajoy is fully aware that each government that has requested a bailout has not survived. As a matter of survival, he will hold off as long as possible. His party is facing regional elections on October 21, so there will not be a request before this date.
The most important part of the equation is that Spain cannot be allowed to fail, so none of the eurocrats or politicians are going to call Spain out on its dodgy accounting. They will not do anything that may precipitate a market panic, so they do not have the leverage to force Spain to act.
The end result of the math and the political calculus is that Spain will continue the present status quo until it runs out of money. I think that it can make it into the first quarter of next year operating in this fashion.
People of Spain, I have a better idea. Revert bank to the peseta. If you wish to see how awesome it is to have your own currency, check out Iceland. Your northern friends experienced a depression, but that is behind them now. Their country is growing nicely, and it is all thanks to the retention of their national currency which the market devalued allowing the Icelanders to pay off their debts and export their way out of trouble.
If you wish to remain in the Eurozone, then look at Greece, because the cradle of democracy is your future. Expect an indefinite depression caused by the straitjacket of the euro.
Of course, if you drop the euro, you lose all of its benefits, which are what exactly? Oh right, it’s good for business. Except with a 24% unemployment rate and a cratering GDP, is it really good for business? It’s definitely good for German business as it gets a weaker currency to pad its exports.
A bailout would also be great news for the German banks that hold Spanish debt and loans, and they should be paid in full at the the expense of the Spanish taxpayer; it is only fair, right?
What is best for Spain? Adopt the peseta and you’ll be out of the depression within two years. Within five years, you will be borrowing on international markets again. Or you can let your politicians continue to put Germany’s interests ahead of yours. It’s up to you.