UPDATE: I’m scheduled to be on CNBC’s “The Kudlow Report” at 7:50 p.m. this evening talking about Europe.
UPDATE , June 12: Chancellor Merkel is right once again:
LONDON (MarketWatch)– German Chancellor Angela Merkel said on Tuesday that the debt crisis in Spain was a result of “the Spanish property bubble of the last 10 years” and not simply about macroeconomic factors, according to a Reuters report. “It was right for Spain to ask for help recapitalizing its banks,” Merkel said. The European banking Authority, she added, had failed to properly diagnose the problems of the Spanish banks, according to the Reuters report. Reuters reported that Merkel once again dismissed calls for jointly-issued euro-zone bonds. Bond yields on 10-year Spanish government debt breached euro-era highs on Tuesday.
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There must be somebody besides us ex-bankers-in-remission rolling around the floor laughing about the succession of headlines on Saturday afternoon. First came this:
WASHINGTON (AP) — The International Monetary Fund is estimating that Spanish banks need at least a euro40 billion ($49.87 billion) capital injection following a stress test it performed on the country’s financial sector.
and an hour or two later, this:
Spain will seek financial help from its Eurozone partners but exactly how much won’t be known until private audits are undertaken, the country’s economy minister announced Saturday. Earlier, European finance ministers discussed plans to offer Spain up to $125 billion (100 billion euros) in a bid to stabilize its banks — and ease concerns over the even bigger European debt crisis. That amount was described as an upper limit, not an indication of what Spain would ask for. After Spain’s announcement, the Eurozone ministers issued a statement that they expected a formal request “shortly” and are “willing to respond favorably.” Spain earlier said it wanted to wait for two independent audits — due by June 21 — before deciding on whether to seek aid, and it was not clear if those audits were being stepped up.
It’s $49 billion–no–its$125 billion! Either this is a particularly aggressive effort to soften up European sentiment for an even larger bailout, or it is the product of a general panic in the Spanish government and the European elite. In fact, the butcher’s bill probably will be a multiple of the promised $125 billion. As I wrote in an open letter to German Chancellor Angela Merkel last week, the 184 billion euros in bad loans to which Spanish banks admit is probably less than half the total. The Spanish elite bet the whole economy on a construction bubble which, relatively speaking, has three times the weight that America’s housing bubble did back in 2008. Even worse, Spanish banks have more than doubled their loans since 2008, apparently capitalizing interest (lending more to zombie borrowers in order to book interest payments and avoid a write-off).
Because the Spanish government and banks have engaged in a vast coverup of the financial crisis, it is of course impossible to say how deeply the banks are in the hole. My best guess (based on the lending volume of Spanish financial institutions) is that the real number will be in the $300 billion range. This is a scam, a ripoff, a Ponzi scheme, not a national economy. As I wrote to Chancellor Merkel, to save the credit of Germany and other solvent European countries, the best thing to do is to sacrifice Spain, and draw the line at helping the French banks (who own a lot of Spanish debt). My letter, published first in the Asia Times, was translated into a number of European languages and published in major Dutch, Belgian and Polish newspapers. Chancellor Merkel seems committed to the path of least resistance.
Political cowardice in the face of financial scams on an epic scale is not exactly news these days, but the utter incompetence of the European finance ministers and lack of coordination among the international organizations involved in the deliberations are deliciously new. Never before in the course of human events have so few wiped out so much credibility for so many.