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Spain will need a full bailout

Spain’s interest on its bond yields rose to further record breaking levels sparking some commentators to claim that a full scale bailout of Spain is inevitable.

Fears were raised after the Spanish government revealed that it was postponing the full audit of the country’s banks to September. The announcement fuelled fears that the banks may need a lot more than the €100bn bailout initially proposed by the EU.

The central bank agreed to the delay with the IMF and ECB suggesting that some very bad news was on the horizon. The delay of the result could also be a delaying tactic for the markets, as the results from the Greek elections and Spanish banking bailout failed to improve the markets as further bad news could hammer the Euro further.

Marc Otswald of Monument Securities raised his concerns;
“While Spain achieved its overall target of €3bn of 12 and 18-month Treasury Bill sales this morning, the yields at which these were sold can only be described as prohibitively expensive, having spiked sharply higher from early morning indications.

Quite clearly, the delay to the second part of the audit of Spanish Banks to September was exactly NOT what the doctor ordered, nor was the German constitutional ruling on the European Stability Mechanism (not that it will delay the start of the ESM, but it is another “ball and chain” in terms of German political decision making processes.)
Still the key point is that if Spain is paying those kind of levels for its debt, it needs not only an ESM package to recapitalize its banks, it also needs an outright bail-out package, and it is becoming very difficult to see how it can manage without that beyond the end of Q3, unless yields fall dramatically!

‘The issue is in fact about the breadth of estimates about how much is needed to recapitalize Spain’s banks and as my father used to say: who is going to pay for that?, and when will Spain be forced into requesting a full bail-out (one estimate suggests €300bn), which should or would be the cue for Germany to say goodbye to the Euro.”

A number of financial institutions have suggested that a complete bailout for Spain could cost the Eurozone nations between €250billion to a massive €400billion, which has caused many to doubt whether the European central bank has the resources to pay for it. If Spain goes down the bailout path then it is a near certainty that contagion will spread to Italy and inflict a massive impact on the other struggling Euro nations. Greece’s problems are like a fly compared to Spain’s elephant.

A sign of the increasingly difficult conditions in Spain is that police have now been dispatched to patrol the countryside to protect farms which have seen a huge increase in the amount of crops being stolen.

“This has emerged because of social alarm. Because of the crisis, crime is up,” said a local police chief Ernesto Banos. “And when cherry season comes around, people say, ‘what now, cherries? OK, let’s go get them.”

Elsewhere the IMF has announced that its crisis fund has received additional support from members of the G20 nations that are meeting in Mexico. The fund was put in place to try and protect the global economy from the Eurozone fallout and the extra cash brings the total amount to $430bn.

Will that amount be enough if Spain does require a bailout? Only time will tell.


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