(chart from ZeroHedge)
The only people who believed the results of Spain’s banking stress tests were the journalists reporting them. Even Oliver Wyman, the consulting firm who prepared them, has refused to comment on the results.
I read several blog posts picking apart the tests, but the MSM went on blithely reporting them without questioning anything about the process or the assumptions underlying the tests. The fact that markets are not moving after learning that Spain is quickly approaching the worst case scenario shows that no investors did not believe in the results. Actually, markets are moving. Spanish yields have decreased as investors attempt to front-run a bailout.
Spanish banks will greatly exceed the worst case scenario within a few months. This is how banking crises work. Once a negative feedback loop starts, it only stops once a bottom has been reached. This bottom is nowhere in sight.
Spain’s economy is reeling, and its budget situation is worsening. This will lead to more cuts in the name of austerity, which will further erode the economy. Using the Greek path as a guide, Spain is set for its economy to shrink over 3% for the next two years causing even more loan defaults than anticipated.
The news for these insolvent banks is only going to get worse, and they are stuffed to the rafters with Spanish sovereign debt. Before all is said and done, Spain will need to pony up more than the €100bn that it has asked for. Add this figure to the €60bn in must finance for the remainder of 2012 and an estimated €207bn for 2013 based on very rosy growth predictions.
Whether the mainstream media wishes to report it or not, Spain is about to fail without a huge bailout.