The Spanish Bailout

“España no es Uganda.”

Translated in English, the statement says, “Spain is not Uganda.” According to El Mundo Spanish Prime Minister Mariano Rajoy sent that text message to European leaders just hours before the now Spanish bailout went down.

Spain is certainly not Uganda but it is Greece and it will no be the last European country that requires a bailout.

On Sunday evening there is still speculative information about the details of the 100 billion Euro bailout. What we do know is:  there will be no condition on fiscal policy or structural reforms and the loan will sit on Spain’s balance sheet. This brings up an interesting push/pull; the loan needs to be big enough to convince the market the Spain’s banking issue is addressed while not being so large to jeopardize Spain’s public debt.

This bailout looks like a much bigger version of TARP. As TARP was 5% of US GDP while this bailout is 10% of Spanish GDP.

Below are the main questions:

1) Where will the money come from?

The cash will from the ESM and/or EFSF. Which leads to the main worry: does the EFSF have enough cash to cover the bailout costs? The world’s largest hedge fund, Bridgewater, believes that once it’s time to bailout Italy its game over.

2) Where does the money go?

The bailout cash will go to the FROB, also known as Fund for Orderly Bank Restructuring. Which is a fund-to-fund insolvent banks.  It would seem that the FROB looks like a weaker version of the FDIC.

3) What happens to Spanish sovereign debt?

Spanish bondholders are basically getting their first taste of subordination. After watching what happened to holders of Greek Government Bonds, holders of Spanish debt should run for cover. For more on subordination check out this excellent piece by Zero Hedge.

4) What does this mean for Europe?

This is a giant step for Europe as it is now clear that the bad risks will make there way to the public sector. Moreover, it looks like European officials may have bought a little time. How much time? I’m not sure, maybe a few hours, maybe a month or two.

During the next few weeks keep a close eye on Spanish sovereign bonds because once the short-term painkillers wear off, the market will understand another bailout is most likely needed.

Lastly, the next euro-nation to watch is Italy, as it will require a bailout next. As for the next big European event, the Greek election next week should rile the markets.

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