Is Spain’s Check in the Mail?

It’s a big mystery where Spain will get the money for its so-called bailout, given how urgently its banks need a life supporting transfusion. The European Financial Stability Facility or the European Stability Mechanism are mooted, but no-one yet knows which Spain will have to rely on. My suspicion is that the check is “in the mail.”

The EFSF, a temporary bailout fund, has limited funds, and there’s scant demand for any bonds it issues. It is having to underwrite its own bond auctions to raise what amounts to tiny sums. In any case, Germany, France, the Netherlands, and Finland want the loan to come from the ESM which has ‘preferred creditor status’, meaning it must be paid back before any other creditors.

However, the ESM is a non-existent entity. Only four of the necessary seventeen EU members have ratified legislation to create it. In the current political environment, we may be waiting some considerable time before it is up and running – as it requires 90% of EMU voting rights – if it ever comes into existence at all. Together, Austria, Belgium, and the Netherlands could block it. So could a combined Belgium, Netherlands, and Slovakia. Also, Finland’s demands for collateral for its portion of the Spanish loan could be a deal-breaker.

But will Germany itself ratify the treaty? The ESM has turned into a political football, with opposition parties demanding a financial transactions tax and more measures to generate economic growth in Europe before they will sign. Yesterday, Germany’s government and opposition parties failed to resolve the row holding up parliamentary ratification of both the EU’s new fiscal treaty and the euro zone’s permanent rescue fund. Talks will resume next week. No wonder that German opposition leaders say it is completely unrealistic to expect the ESM to be ratified before the 1 July deadline.

Meanwhile, the electorate is wising up to the huge sums it is being asked to pay: Germany’s exposure to these facilities would be €401 billion, if the entire resources of the EFSF and ESM are eventually called upon. Only last night, a “twitter war” broke out in Germany at #stoppesm.

Farcically though, the maximum funds the ESM will have at its disposal in 2012 is actually only €140 billion, as Mike Shedlock aka Mish points out. because the ESM is a five year plan, and only 20% of it will be paid in each year. For obvious reason, Greece, Spain, and Portugal will not be able to contribute, so the total funds available may only be €116 billion. Moreover, isn’t borrowing at 6% to lend to its neighbours at 3% going to outrage the Italian public? Subtract another €25 billion. That leaves around €90 billion, which is less than the €100 billion promised Spain.

The real amount of money needed to bailout Spain is in the hundreds of billions of euros, though, and rising, as Spain’s house price collapse accelerates. As Graham Summers at Pheonix Capital bluntly tells his investors: “There aren’t any funds left to prop up the €46 trillion toxic sewer that is the EU banking system. End of story.”

(On Twitter @TheAngryAnalyst)