PIGS at the Trough


It was announced today that the world now has porcine in the plural.

Portugal, Ireland, Greece, and now Spain.

After a contentious phone conference among the EU’s muckety-mucks, Spain will receive $125 billion in loans to shore up the capital in their banks.  Spain’s economy minister, Luis de Guindos, announced that the loans (coming from the EFSF, and not from the IMF) will be added to Spain’s bailout fund, then pushed into the failing banking system.  While initial estimates of the size of the Spanish bank-hole were around $60 billion, The EFSF wanted to over-promise in order to bring confidence back into the system.  “Going forward, it will be critical to communicate clearly the strategy for providing a credible backstop for capital shortfalls — a backstop that experience shows it is better to overestimate than underestimate, ” said Ceyla Pazarbasioglu, deputy director of the IMF’s monetary and capital markets department (as well as the winner in the “Impossible to Pronounce Name” contest).

But here’s the thing (or things).  From the beginning, Spain has never been clear (or truthful) on the capital needs of their banks.  Take the recently nationalized Bankia, for example.  On May 21, Bankia was nationalized by Spain to plug the 4.5 billion Euro hole in its capital.  By May 23 that figure had risen to 9 billion Euro.  The following day the number rose to 15 billion Euro.  By the 27th, when all was said and done, the total bailout was 19 billion Euro.  I’d hate to apply that same kind of exponential math to the $60 billion number being thrown around today!

Further, there is the issue of the cajas.  Basically these are Spanish savings and loans.  A bunch of them were failing and subsequently were bundled up to become the bank known as Bankia.  Even more of them, however, are still walking the Spanish landscape like so many George Romero extras at the mall.  Being highly unregulated, these cajas made many, many sub-prime (and worse) loans during the inflating of the Spanish real estate bubble.  This isn’t merely speculation.  To wit, I refer you back to the founding of Bankia.  No clear number that I can find totals the bad loans buried within the cajas.  And if someone knows, they ain’t talkin’.

The bright side to all of this is that Spain, who was effectively cut out of the bond market, can now borrow at sub-market rates from the EFSF.  Also, the lack of IMF participation leaves the American taxpayer out of the lending syndicate.  It’s also likely to be short-term bullish for stocks (and bearish for US bonds).

That is, until the markets decide that bad news is actually… well… bad.

I have to think we’re getting awfully close to that point.

Saving Spain’s banks may have been necessary, but the act of saving them screams to just how bad the European situation has become.

To conclude with a quote from Ben Bernanke at this week’s Congressional hearing, “a trillion here and a trillion there and pretty soon your talking about real money.”