Monday, June 11, 2012

Some Questions About The Spanish Bailout

So Spain picked up a tidy 100,000,000,000 Euros over the weekend to save its ailing banks. A couple of questions arise.
  • Where did the money come from? If everyone is borrowing, who had the money to lend? The only thing I can think of is that the ECB printed more Euros.
  • Why won't this money simply go to assist in the financial evacuation of Spain? That is, if you hold bonds or stock or assets in one of these Spanish banks and haven't been able to cash it in until now because the banks are such toads that no one else wants to have anything to do with them, what's to prevent this 100B from simply buying you out as you flee the scene?
  • Spanish interest rates are rising again, less that 72 hours after the deal was done. After this sugar rush is done, what comes next?
  • The German economy is big, but it's only as big as Italy and Spain combined and both of them are in trouble. How long before even Germany can't stop the slide?
  • Speaking of Italy, where are they in all of this? How long before they start getting a share of the headlines?
  • Why isn't this this a good summary of what just happened: 100B Euros were printed out of thin air and handed to banks who handed them to depositors, creditors and bondholders who are fleeing the scene?
  • Lather, rinse, repeat?


tom said...

Wouldn't you be cashing out? There's clearly no intention to pay back any of these loans. Look at the US... every single day we run up a few billion in debt, "pay" for it with short-term borrowing, then roll over 15 Trillion of old debt into another short-term loan.

If you want to destroy the world economy, either refuse to roll over loans (cash out), or make interest rates rise.

K T Cat said...

You bet I'd be cashing out!

tom said...

In related news, this morning's WSJ said US stock futures were up based on the Spanish bailout. Like clockwork, the lunchtime report is "U.S. stocks erased their gains within an hour of the opening bell as investors took a critical look at Spain's weekend bailout. A sharp rally in Europe faded."

I wonder when US investors are going to figure it out and stop getting excited when the EU promises to bail someone out. This pattern is happening way too often.

As others note, "unexpectedly!"

tim eisele said...

"100B Euros were printed out of thin air and handed to banks who handed them to depositors, creditors and bondholders who are fleeing the scene?"

I kind of wonder whether this is an unintended consequence, or whether this was exactly what the people in charge wanted to happen.

In 2008, a lot of very well-connected people found themselves holding a "hot potato" of several trillion dollars worth of bad debts. They are still passing the potato around, trying to get their government buddies to find a way to pay them off before they get burned. The best-connected managed to bail right away, but there are still a lot left. I think this is just the latest phase of the whole deal, where the governments take on debts themselves so that the big boys can cash out and be safe. The (rhetorical) question in my mind is, who is going to get stuck holding the potato in the end?

tom said...

Here we go again... "Consumer discretionary shares led a rally in U.S. stocks as labor and inflation data prompted speculation the Federal Reserve will announce further economic-stimulus efforts."

Is this really a causal relationship? Does anybody really think the Fed has any better ideas than the EU at this point? "Hey, let's bid up some stocks because today's the day Bernanke's going to come up with something that works!"