How Much Does It Cost For A Full-Scale Spanish Bailout?


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(EU) The think-tank Open Europe does not see a Spanish sovereign bailout as possible as it would cost up to €650 billion. Additionally, with borrowing costs seen as unsustainable, the government may be forced out of the private market for up to three years. The study suggested between now and 2015, Spain has funding needs of €542 billion with banks requiring an additional €100 billion.

(EU) Sean Egan of Egan Jones was interviewed on Bloomberg TV and said:

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“There are multiple problems in Spain. One is the 24 percent-plus unemployment rate. Another one is the underrecognized real estate losses. Another is the undercapitalized banking system. Third or fourth is the high funding costs. There are a huge number of relatively difficult problems to solve in Spain, and that’s why the bond yields are increasing.”

When asked about having downgraded Spain six times since April and what it would take for Egan to maybe consider upgrading Spain, he told Bloomberg TV:

I’m not quite sure that they are going to be able to get out of the problem very easily. We use the metaphor of a black hole, and it appears as though they are entering the point of no return, whereby the debt is going to have to be cut for Spain to eventually pull through it.

(EU) Egan-Jones said Spain is facing funding deficits of about EUR50 billion per year for social payments and EUR35 billion for interest. The country’s weak economic situation is exacerbated by the country’s unemployment rate of more than 24%, Egan-Jones noted. Egan-Jones increased its one-year default probability to 18% from 15% for the country.

How to interpret these headlines?

Let me just say that the headline from Open Europe DOES NOT MEAN THERE WON’T BE A SPANISH BAILOUT!  To the contrary, evidence suggests that there will be, but just that it would be impossible to bailout Spain with the current ESM or EFSF mechanisms!

I think it is clear with the points mentioned by Sean Egan from Egan Jones that Spain is already at the point of no return, and it is now just a matter of time for them to request for a full-scale bailout (perhaps in late 2014 or early 2015) and the process will test the strength of the European Union, because a Spanish Bailout is a make or break deal for the EU.  Although it is still quite some time away, any unforseen factors could accelerate the timetable, therefore I’d be very careful in going LONG on the Euro with unrealistic targets (i.e. use tighter take profit targets), despite of what Draghi is planning to do in the upcoming ECB Meeting.

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About Henry Liu

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