Spain Offers Yet Another Impossible Solution to Its Problems

Spain continues to heap one impossible idea on top of another.

The latest “plan” consists of Spain creating a bad bank called SAREB that will buy up bad assets in Spain in an effort to clean up the country’s finances.

SAREB was part of the €100 billion Spanish bailout plan which was set forth in June. Once again, none of it makes any sense.

Spain’s Bad Bank to Buy Up Assets

SAREB, which is set to begin operations on Dec. 1, will absorb soured investments that have dragged down the balance sheets of Spanish banks since the collapse of the country’s housing market four years ago.

Fernando Restoy, head of Spain’s bank-bailout fund, said SAREB will likely purchase about €60 billion of toxic assets using Spanish resources and some of the funds allocated under the bank-bailout agreement.

It will apply an average 63% discount on land and housing units and an average 46% discount on real estate loans, he said, and will aim to sell the assets to investors over the next 15 years, with a return on investment of at least 14% for any investors in the bad bank.

Wait a second… isn’t Spain bankrupt?

After all, their regional bailout fund has used up all of its funds, the country has only received €30 billion of the original €100 billion bailout, and Spanish banks are now beyond broke, selling even Spanish sovereign bonds to free up cash to face a systemic bank run (18% of deposits have fled Spain this year alone).

So where exactly is the €60 billion going to come from? Even if Spain uses all of the €30 billion it’s received in bailout funds so far, it’s still €30 billion short.

Even if Spain were to get the funds together to do this… this move is still not big enough. Spanish Prime Minister Rajoy admitted in private that Spain’s real funding needs are in the ballpark of €500 billion. And that’s assuming he knows the true state of Spain’s finances (unlikely given that he’s a career politician with no financial background).

Folks, we’ve been through this whole mess before with Bankia.

For those who have forgotten, Bankia was planning on issuing a dividend just one month before it was nationalized. Then, within the span of a few weeks, it:

1)   Requested a bailout for €4.5 billion which eventually rose to €19 billion.

2)   Revised its 2011 profits to a €3.3 billion loss.

3)   Had to be nationalized.

This is what all of us should keep in mind as a true representation of Spain’s financial system: a completely artificial appearance that comes crashing down in a matter of days.

A few final thoughts on Spain:

1)   In June, Spanish banks were drawing €300 billion or so from the ECB, today that number is north of €400 billion. If things were improving it should be shrinking.

2)   As mentioned earlier, Spanish banks which were essentially the only buyers of Spanish sovereign bonds are now selling them to meet funding needs due to the country’s bank run. So who is going to buy Spanish sovereign bonds? The ECB? How and when?

3)   Spain’s unemployment just topped 25% (again the wrong direction for things to be moving).

At the end of the day, you can announce all the fancy sounding programs you like. But unless someone comes up with actual cash none of it announces to much other than political posturing.

With that in mind, Spain remains the primary issue for Europe. I cannot say when this house of cards will come crashing down, but crash it will. It’s only a matter of time.

Indeed, between Spain’s woes, a hard landing in China, the EU, China and US in recession, and the like, I cannot actually remember a single time in which the global economy and financial system have faced this many difficulties. And that includes the build up to the 2008 Crash.

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Posted by Phoenix Capital Research