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TheStreet Open House

Euro Crisis Solved, for the Umpteenth Time

Superman: Easy, Miss. I've got you.
Lois Lane: You -- you've got me? Who's got you?
-- Superman, 1978

NEW YORK ( TheStreet) -- This is the first of my weekly columns at TheStreet.com on Euro Crisis so I'll try to keep my cynical inner child on short leash. If you doubt my sincerity, please re-read the title.

Facts on the Spanish bank bailout have been quickly and widely reported. In summary, points worth highlighting include:

  • Spanish government may get up to 100 billion euros from somewhere, sometime over the next month or two, likely either EFSF if finalized before end of June or ESM, which will succeed EFSF in July.
  • The money will be a loan to the Spanish government, i.e., a liability of the Spanish government that may be pari passu (equal in seniority to other sovereign bonds), if funded by the European Financial Stability Facility, or senior to other debt if funded by the European Stability Mechanism.
  • The loan rate will be much lower than the equivalent Spanish sovereign yields.
  • The loan will be used by Spanish government to recapitalize banks, somehow.
  • Unlike the treatment of Greece, Ireland and Portugal, this rescue package does not carry any fiscal condition on the Spanish government. However, it is implicitly dependent on the austerity measures and deficit targets nominally endorsed by the Rajoy government, which won election last December.
  • It does, however, carry specific conditions on banks ultimately receiving the funds.
  • Perhaps more importantly, Der Spiegel reported Saturday ( via CNBC) that "European Union Commission President Jose Manuel Barroso, European Council President Herman Van Rompuy, Eurogroup head Jean-Claude Juncker and European Central Bank President Mario Draghi are working on plans for a 'genuine fiscal union' in which individual member states would no longer be able to independently take on new borrowing." Notably, no Germans are invited to the meeting so its credibility is zero but still . . .

    Judging by news reports, commentaries, and the futures market as of Sunday night, this is expected to be a big risk-on trigger. EUR will likely spike up, if only as a squeeze of the recent massive short position (note to self: yet another example of crowded trade going bust). USD will go down and, as a result, gold will go up (if gold's change is significantly out of line vis a vis the USD, then it'd be something to scrutinize further); so will stocks.

    But before you jump on the bull wagon, here are a few things to think about in the longer term, meaning from a few days to a few weeks/months:

  • The short-term bullish outlook is so one-sided that it might exhaust itself soon.
  • As indicated above, there are still a lot of uncertainties about the deal. When they are clarified, disappointment is virtually certain; the only question is how much and what.
  • Rajoy vehemently insisted Spain wouldn't need help just a few months ago. Why should we believe him on any assurance he utters now? For that matter, why should we believe anything any eurozone leaders say, except the Germans, based on their perfectly consistent trackrecord of denial and false assurances and promises since 2009?
  • Germany, the sole Eurozone superpower, has been conspicuously absent in most of this excitement. It looks more and more likely that they'd have to kick out either Greece (and eventually the rest of PIIGS) or Germany. Whatever the currency may be called without Germany, it wouldn't be a major one.
  • The no-strings-attached package for Spain could cause huge political backlash in Greece, Ireland, and Portugal, which have to pay heavy prices for their respective rescue. This deal, before it has any chance of finalizing, will probably tilt the political scale in Greek election on June 17 heavily in favor of the opposition, resetting the entire Greek deal, and hastening "Grexit."
  • Here's one way to look at the deal: Eurozone countries fund the package for Spanish government, of which the Spanish government is responsible for ~12% (and Italy, the next target for bond vigilantes, is on the hook for about 18%). If this conjures up images of a bunch of drowning guys bravely rescuing each other by pulling each other's hair, congratulations: You are still sane and logical.
  • Here's another way to look at the deal: the Spanish government will lend the money to Spanish banks, which have been the main buyers of Spanish sovereign debt over the past few years to maintain the illusion of the government retaining market access. Now that banks ran out of money, the government will step up to lend money to banks so that banks can lend money to the government.
    Beautiful design, no? Actually, no, because this puts Spanish sovereign debt at even greater risk of further downgrade, which in turn would require more buying by Spanish banks and put EFSF's credit under further stress. The amplitude of a positive feedback loop, thus potential chain reaction, has just been racheted up.
  • Finally, my personal favorite. Back in 2010 I got the quarterly GDP data from Spanish National Statistics Institute and was shocked by the smoothness of it. Here's an update, again directly from the official horse's mouth:

    Notice how Spain's GDP is smoother than both EA-17 and EU-27, which is hard to make sense of. I continue to suspect that, someday, somebody with the resources will tear apart Spanish official GDP data and expose a much bigger (at least in terms of impact) fraud than Greece's in 2009.
  • Back to the title: no, the Euro crisis is not solved, nor will it ever be solved until it either breaks apart or there's a real political union. But the drama will surely continue. Try to be amused while you can, befriend volatility, or at least don't make an enemy of it.

    This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

    At the time of publication, the author was long UUP.

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