Hope
persists that Germany would not only bail out Spain and the rest of
the Eurozone but would also tolerate the Fed-ization of the European
Central Bank. Even Treasury Secretary Tim Geithner was hounding
German Finance Minister Wolfgang Schäuble, who was on vacation like
the rest of Europe. And yet, Deutsche Bank, Germany’s de-facto
vice-ministry of finance whose CEO serves as éminence grise behind
elected officials and bureaucrats alike, well, that venerable
institution at the core of Germany Inc. appears to be closing the
book on Spain…..
Is
Germany Preparing For A Spanish Default?
Wolf
Richter
31
July, 2012
Hope
persists that Germany would not only bail out Spain and the rest of
the Eurozone but would also tolerate the Fed-ization of the European
Central Bank. Even Treasury Secretary Tim Geithner was hounding
German Finance Minister Wolfgang Schäuble, who was on vacation like
the rest of Europe. And yet, Deutsche Bank, Germany’s de-facto
vice-ministry of finance whose CEO serves as éminence
grisebehind
elected officials and bureaucrats alike, well, that venerable
institution at the core of Germany Inc. appears to be closing the
book on Spain.
And
it’s Spain everyone is worried about. Not Greece. Which appears to
have become a fait
accompli.
Even with Geithner. After his meetings with Schäuble and ECB
President Mario Draghi, Geithner called Spanish Economy Minister Luis
de Guindos. According to “sources of
the Spanish government,” they tossed around solutions to stabilize
the Eurozone and resolve the debt crisis that is ravaging Spain and
Italy. Not a word about Greece. It has fallen off the agenda.
Spain
is suffering from stratospheric unemployment, banks on life support,
a moribund economy, and bankrupt autonomous regions. One of them,
Catalonia, announced itwould
not be able to pay hospitals,
schools, social organizations, child care centers, etc., public and
private, for contracts they have with the government. The noose
tightens.
So
a week ago, de Guindos met with “el
todopoderoso Wolfgang
Schaüble,” the almighty Schäuble, as El
País calls
him (including the umlaut on the wrong vowel), to work something out.
It’s urgent. Spain will run out of money in October unless it can
raise enough to cover the bonds that are coming due, pay for its
ongoing deficit, and bail out its regions. But it doesn’t want to
pay the elevated risk premium the market demands for its bonds, and
it doesn’t want to ask for a bailout because it doesn’t want the
Troika—the austerity jocks from the ECB, the EU, and the
IMF—breathing down its neck and run the show, as they’ve done
with such great success in Greece. Spain wants to keep its
sovereignty and dignity. If nothing can be worked out, Spain would,
according to government sources, default. That word made it into
print. With immediate effect [read.... The
Extortion Racket Shifts to Spain].
So
the best solution on the Spanish wish list would be for the ECB or
the bailout funds (the EFSF and later the ESM) to buy Spanish bonds,
either in the secondary markets to force yields down, or directly,
but without any
bailout conditions—precisely what the German Bundesbank and the
Ministry of Finance have vowed to oppose: bailouts would come with
conditions, namely budget cuts and structural reforms.
Alas,
as long as “el
todopoderoso”
Schäuble demands conditions, Spain won’t request a bailout. Not
until the very last minute. A game of chicken, with default as
consequence. Geithner was probably telling de Guindos to back off and
request a formal bailout and get it over with as soon as possible to
avoid a crisis whose effluent might drift across the Atlantic and
seep into the shaky US economy. President Obama’s reelection would
be at stake.
But
then Deutsche Bank released its
earnings. They weren’t pretty; 1,900 jobs would be cut. And
ominously, the bank, which walks in lockstep with the German Ministry
of Finance, had dumped 37% of the Spanish sovereign debt still
remaining on its books. By the end of June, it only held €873
million, down from €1.4 billion three months earlier. A process
that is likely to continue—now that default and October had
appeared in the same paragraph in Spanish papers. And so the bank is
walking away from Spain, in synch with el
todopoderoso Schäuble’s
rejection of Spain’s wish list.
Deutsche
Bank isn’t the only one. Capital flight continues to set new
records in Spain. According to the Bank of Spain’s just
released Balance
of Payments,
€41.3 billion left the country in May, bringing the first five
months of the year to €163 billion. Eleven consecutive months of
declines! For a total of €259
billion.
21.6% of GDP. And those are the people who know best.
The
coordinated confidence-inspiring words from the Eurozone’s fearless
leaders about doing whatever it would take to save the euro was a
sign that they were afraid of Spain. Its threat of default had been
effective. The ECB caved. And in doing so, it threw down the
gauntlet. Read.... War
Of The Central Banks?
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