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As recently as May 28, Spanish Prime Minister Rajoy was claimingthat "there will be no Spanish bank rescue". He miscalculated. Hehad hoped the ECB would come to his rescue. Not only has the ECBnot resumed its sovereign bond purchases, but it did not even throwit a bone by cutting rates, which surely are justified based on thetrajectory of the euro zone economy, where conditions havedeteriorated markedly since the end of last year and the last timethe ECB rates. There are only two issues now. How much money does Spain need andunder what terms? The IMF's stress test, assuming about a 4% economic contraction,reportedly revealed that Spanish banks would need another 37 blneuros to cope. However, this does not seem be as much of "worstcase" scenario. It had contract 3.7% in 2009 and although thecontraction less than half the pace, it looks as if it will beprotracted. While it may seem to be in Spain's interest to request the leastamount of funds, the risk is that a limited program fails torestore confidence. Estimates range from 60-80 bln euros at thelow end to 100-120 bln euros at the high end. Yet as we haveargued, because real estate and housing prices have not completedthe correction from the bubble, the depth of the Spanish bankingproblems are difficult to measure with any confidence, butestimates of eventual losses run towards 300 bln euros. When Fitch cut Spain's ratings by 3 notches a few days ago, itwarned Spain was likely to contract this year and next. Even ifSpain gets an extra year to reach the 3% deficit target, it meansthat additional austerity will be delivered for the next couple ofyears, which weakens the economic outlook. Structural funds andinfra-structure projects will likely be too small to really dentthe austerity on both the federal and regional levels. What we have called Spain-lite is an effort to 1) get Spain funds for a bank recapitalization and2) without the stigma attached to the programs in Greece, Irelandand Portugal. It appears Rajoy is now willing to seek official assistance. Hisnegotiating position can be summarized in five no's: No loss of sovereignty No new fiscal conditions No new deficit commitment No additional structural reforms No IMF The EFSF/ESM has been authorized to loan to countries for bankrecapitalization purposes. By keeping the IMF out, and bringingthe EBA in, Spain hopes that it can avoid the worst of the stigmaand keep it to a limited bank recap program. There is a conference call among key officials in Europe shortly. Contrary to speculation, few specifics are likely to emerge, evenif there is an agreement in principle. As Spain edges closer to aformal request, Moody's appears poised to cut is A3 rating for Spain. And don't forget the bizarre rules of engagement and the firstmover advantage. If Cyprus formally requests aid before Spain,Madrid will have to participate. However, if Spain asks for aidbefore Cyprus, Cyprus will have to participate in Spain'sassistance. Read more posts on Marc to Market » I am an expert from personalized-lapelpins.com, while we provides the quality product, such as Bottle Opener Keychains Manufacturer , China Metal Pin Badges, Metal Keychains,and more.
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