The half-life of a bailout has never been shorter.
Just a few days after Spain's banking system was bailed out, Spain's borrowing costs hit a record high.
Spain’s benchmark borrowing costs rose for a fourth day after touching a record yesterday, raising the specter of sovereign bailouts for the government in Madrid and then Italy that would stretch European Union finances to their limit.Translated: $1.4 Trillion of bailout money was thrown into the blackhole that is Europe's banking system. Wasted.
The bond rout wiped out the effects of 1.1 trillion euros ($1.4 trillion) in official funding for euro-region banks that has held yields in check since December. Spain’s 10-year yield is close to the 7 percent level that forced Greece, Ireland and Portugal to seek bailouts. Italy, the second-biggest sovereign borrower in the euro area, may need to seek a rescue within months, said James Nixon, chief European economist at Societe Generale SA (GLE) in London.
And as for Italy getting a bailout, that is never going to happen. Italy's economy is too big and their debts are too large. Germany would never agree to it. Not in a million years.
In Berlin, German Chancellor Angela Merkel and her Finnish counterpart, Jyrki Katainen, who both manage AAA rated economies, yesterday told southern European nations to keep implementing the austerity plans that have driven them into recession. They said Europe wasn’t ready for debt sharing through euro bonds.That pretty well sums up Europe's problems. Spain has cut their budgets deeply in midst of a depression, which further depresses their economy and thus makes budget targets impossible to reach.
Introducing euro bonds “is putting the cart before the horse and absolutely leads us down the wrong road,” Merkel said...
“The crisis will inevitably roll on to the next domino, and that’s Italy,” Nixon said in a telephone interview. “The southern European economies are effectively in free-fall and market appetite for southern European debt is rapidly drying up. I can’t see anything to turn that dynamic around.”
Rajoy’s cuts are so deep, equivalent to about 4 percent of last year’s GDP, they are undermining growth and reducing tax revenue, according to economists at Goldman Sachs Group Inc. (GS)
“The deficit target is close to impossible at this point,” Pavan Wadhwa, global head of interest-rate strategy at JPMorgan Chase & Co. (JPM), said in a telephone interview yesterday. “It’s going to be very hard for Spain to hold on.”
Because of their economic depression no one wants to lend to them, thus they are priced out of the debt markets and can't afford to borrow. It's an impossible situation, and Spain is simply too large to ignore like Greece was.
Speaking of Greece, their nationwide bank run has kicked into overdrive.
Daily withdrawals have increased to the upper end of a 100 million-euro ($125 million) to 500 million-euro range this month, one banker said, asking not to be identified because the figures aren’t public. A second banker said the drawdown may have exceeded 700 million euros yesterday.This one is real simple to understand: if the bank runs keep up the Greek banking system will go under. As in totally vanish. Greece, already in a depression as well, threatens to see a full scale economic collapse.
At 500 million euros a day, deposit outflows would probably exceed the previous monthly peaks since the outset of the crisis, and wouldn’t be sustainable if they continued over several months, according to one person.
Meanwhile, the more forward seeing investors are already targeting Italy.
The Rome-based Treasury sold the one-year bills at 3.972 percent, 1.63 percentage points more than the 2.34 percent at the previous auction on May 11.While yields are still low and affordable, the size of the jump is disturbing. It's evidence of fear in the markets.
Europe can survive a Greek default and exit from the Euro (what happens in Greece may be another story).
Europe may or may not be able to handle a much larger Spain default. If the next Spain bailout is as disastrous as the recent one, then Spain is in real trouble.
Europe can not bail out Italy. That just simply is not going to happen. A default in Spain will likely trigger a panic in Italian bonds, thus Europe's crisis point is very, very near. We are probably talking about weeks now.
What this means is hard to say because we aren't just talking about economics. This is as much about politics.
Barring a miracle, Greece will be exiting the Euro before the end of the year. How this plays out is purely a political decision.
If the governments want to keep the Euro in its present condition, they must find a way to rescue Spain. Will they do that? I'd bet against it.
If Spain defaults then it seems more than likely that Italy will get priced out of the debt markets as well. That would mean the end of the Euro as we know it.
I would expect some form of Northern Euro to emerge when the dust is settled. But we'll see an extended depression across southern Europe with extreme, and unpredictable, political fallout.
That means it is likely there will be another global banking crisis before the November elections.