Thursday, June 7, 2012

Spanish Maybes

Another point worth noting in this piece is the current situation in Spain:  
Right now, it's estimated that Spanish banks crippled by toxic property loans need to find at least 80 billion euros in extra capital. Some of this money could come from issuing bank bonds, which investors would be wary of buying, were this rule change to be introduced. Hence, Spain's government will surely have to save its banks, probably aided by a sovereign bailout from the EU and the International Monetary Fund.
Still, Europe seems to have pulled back from the brink.  The 'why' is not so clear.  The Spanish bond auction today could make things much worse.  I suspect it will not.  The euro has not gained any strength in the last few days despite all the chatter, but rather the dollar has sunk slightly.  U.S. equities did not rise on Scott Walker’s win in Wisconsin, but on the fact that the dollar’s recent rise against the euro and the Australian and Canadian dollars has given the Fed room for additional quantitative easing.  The market is anticipating money printing.  You can see this sentiment reflected in precious metals and crude finding a floor and making some gains.  Buyers are trying to lock in bargains before the roof is blown off. 

Quite possibly Spanish bonds will be supported by the Fed either directly or through proxies in order to keep the rates within the sustainable range.  If that does not happen, the EMU could fall apart within weeks.  If the central bankers in the U.S. and Europe recognize the dangers we all face – and I have no doubt that they have more intelligence as well as more accurate and comprehensive data than I possess – they will do their best to soften the impending crash.  This involves an attempt to create a slow, downward spiral between currencies, commodities, and government bond rates.  Too rapid inflation can’t be handled.  Rapid rises in bond rates cannot be sustained.   They seem to think that if they can “balance” and decelerate the collapse, the end result may not be quite as bad.

I suppose “spiraling down” gives people time to adjust to a lowered standard of living – which is what is coming.  Or maybe I am giving the bankers and bureaucrats too much credit, and they really think they can print and borrow their way out of the mess we are in.  They certainly do not want to give up their power.  I cannot pretend to know how this will end, other than ‘not well’.  Greece is already suffering, and it will get worse.  Turmoil in Italy is bubbling to the surface.  Spain teeters.  With Hollande, France will no longer back the German approach of forced austerity and limited bank bailouts. 

The former prime minister of Italy, Berlusconi -- no longer in power but still influential within his party, has suggested that Italy could start printing euros on their own.  That is exactly the kind of rogue action that would rip things wipe open.  This could be a really interesting summer.

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