Wednesday, 16 June 2010 07:49

Why Does Everyone Believe Spain Is About To Run To the EU/IMF For Help? It's Math, Not Speculation!

The EU Denies Planning Spain Credit Line with IMF, US, although rumors and leaks are propping in more places that a Swiss damn being plugged with a bunch of slender, fair fingers of those many blond maidens - after all, Greece did not want and was not looking for aid either. That trillion dollar bailout fund was the result of a bunch of politicians with too much money on their hands having absolutely nothing else to do with their time.

Cliff Wachtel gathers much of the evidence:

After 2 German newspapers reported that Spain was seeking aid, now add a Spanish newspaper, El Economista, as the third to report a coming aid package for Spain, after 2 German papers reported this last week. All reports have been denied by the Spanish Government, which is rapidly losing credibility as the reports build. See details here from Bloomberg.

Yesterday, the German newspaper Frankfurter Allgemeine, citing an unnamed source in Berlin, reported that Spain was discussing a bailout with EU officials following last week’s freeze in interbank lending as markets have lost confidence in the Spanish banking sector. Spain denied the report, did Greece had done the same thing earlier, so EU credibility isn’t what it once was. If the allegations prove true, look for A LOT more downside in risk markets. This was the second such report, the first was last week from from FT Deutschland

Remember that just last week Spain had a 3 year bond sale at an average yield of 3.32%, roughly double the yield needed to sell 3 year bonds as recently as April, an ominous sign given that Spain needs to sell about € 25 bln in bonds in July. It is unclear how long Spain can continue to withstand a doubling of its borrowing costs, which will counteract efforts to cut its deficit.

Cliff provides significantly more anecdotal evidence of an impending Spanish bailout in the link above. I harped on the increase in expenses yesterday:

image001

As you can see, Spain’s 3 yr CDS spreads are the highest they have ever been. They are significantly higher than they were during the entire Lehman fiasco, and they are even higher (or at least comparable) than they were right before the EU/IMF trillion dollar bailout package was announced in conjunction with threatening those who dared to speculate against Spain’s fiscal health!

spain bund spread

As for the EU denying a bailout package, well we at the BoomBust have shown where their credibility stands...


spain finances excerpt

As an addendum to the subscription download that picks apart Spain's public finances (File Icon Spain public finances projections_033010)

,  I have created a multiple scenario Spain restructuring analysis consisting of a combination of haircuts and restructurings in order to give a picture of potential losses to bond investors and potential gains to Spain. The methodology goes as follows:

All figures in billion euros
No haircut on principal amount Involving haircut on principal amount
No restructuring Restructuring 1 Restructuring 2 Restructuring 3 Restructuring 4 Restructuring 5 Restructuring 6
Explanation No extension of maturities and no reduction in coupons Restructuring by doubling the maturity for bonds due from 2010 to 2020 and coupons are kept the same Restructuring by doubling the maturity for bonds due from 2010 to 2020 and coupons are reduced by 50% Rolling up all of Spain's bonds due to mature between now and 2020 into one bundle and exchanged against a single, self-amortizing 20-year bond with coupon equal to 50% of the average coupon rate of the converted bonds Restructuring by doubling the maturity for bonds due from 2010 to 2020 and coupons are kept the same Restructuring by doubling the maturity for bonds due from 2010 to 2020 and coupons are reduced by 50% Rolling up all of Spain's bonds due to mature between now and 2020 into one bundle and exchanged against a single, self-amortizing 20-year bond with coupon equal to 50% of the average coupon rate of the converted bonds

image002

Looking at the funding requirements Spain will have in the near future, even with the IMG/EU bailout, it looks as if there may be a restructuring in Spain’s future.

image015

Let it be known that our calculations show that while the Spain to Spanish bondholders will hurt alot, it is not as severe in many scenarios as it is for Greece. The catch is that there is so much more pain to go around due to the amount of Spanish debt outstanding as compared to that of Greece. This does not seem to have the possibility of ending pretty. Remember the damage done to the highly levered banks with just a slight devaluation of Greek debt in How Greece Killed Its Banks:

The gorging on quickly to be devalued debt was the absolutely last thing the Greek banks needed as they were suffering from a classic run on the bank due to deposits being pulled out at a record pace. So assuming the aforementioned drain on liquidity from a bank run (mitigated in part or in full by support from the ECB), imagine what happens when a very significant portion of your bond portfolio performs as follows (please note that these numbers were drawn before the bond market route of the 27th)…

image001

The same hypothetical leveraged positions expressed as a percentage gain or loss…

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When I first started writing this post this morning, the only other bond markets getting hit were Portugal’s. After the aforementioned downgraded, I would assume we can expect significantly more activity. As you can, those holding these bonds on a leveraged basis (basically any bank that holds the bonds) has gotten literally toasted. We have discovered several entities that are flushed with sovereign debt and I am turning significantly more bearish against them. Subscribers, please reference the following:

Professional subscribers (click here to subscribe or upgrade) should reference "The Spain Sovereign Debt Haircut Analysis for Professional Subscribers".

Last modified on Wednesday, 16 June 2010 10:02

12 comments

  • Comment Link overthetop Monday, 21 June 2010 11:03 posted by overthetop

    Ive looked into that and come to the conclusion that EUFN is probably the best etf to short. But its impossible to borrow any shares to short and it doesnt have any options to trade.

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  • Comment Link monday1929 Sunday, 20 June 2010 16:57 posted by monday1929

    I picked up some PCY puts, thanks. I wonder how we can get them to list some far out-of-the-money puts. I'll have to ask Jamie Dimon.
    Reggie, have you ever heard any more about the "investigation" on who requested and who bought the far OTM Bear puts days before the implosion? Or did that investigation end up the same way as the 9-11 Put deal?
    I think their strategy is to commit so many crimes that the public focuses on the most recent crime only until the next crime is committed. Like Bonny and Clyde.
    I fear their brazaness will inspire some military type to decide that vigilante justice is the only way any justice will be done at all. I do not condone this, but the criminal elite may not have reckoned on this.

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  • Comment Link shaunsnoll Friday, 18 June 2010 17:32 posted by shaunsnoll

    PCY is an interesting tool, using puts and shorting some of these banks could be better for the average reader here though since if this EU situation comes down to it then many of these banks will go to zero. wish there was more clean numbers on greek and other PIGS bank debt assets to see what kind of a run is occuring....

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  • Comment Link monday1929 Friday, 18 June 2010 10:59 posted by monday1929

    Mere months since the worst crash since the (prior) Depression, there is amazingly little volatility priced into anything but BP. Unless oil is spewing out, and unless it is on the TV 24/7, any problem can be denied by the Master Delusionists who populate this fair Country. We should envy them and their granite counter-tops. Maybe they have the right idea.
    Lee S.

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  • Comment Link monday1929 Friday, 18 June 2010 10:40 posted by monday1929

    Of course they will be a sham. Timmy will fly there to help conduct them (and deduct the expense on his taxes). The market will rally hugely when the false results are released.
    Are you new to the Planet? Welcome to planet Delusion. Where it is always sunny and "To Serve Man" really IS a guide to helping humans.

    Lee S.

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  • Comment Link vtholay Thursday, 17 June 2010 04:39 posted by vtholay

    I am just wondering what kind of an effect would the stress test results have on the Spanish banks. Are these stress tests going to be a sham like they turned out in the U.S?

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  • Comment Link Reggie Middleton Thursday, 17 June 2010 03:37 posted by Reggie Middleton

    Sounds interesting. I'll look into it.

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  • Comment Link overthetop Wednesday, 16 June 2010 22:53 posted by overthetop

    they would until germany voted to not participate. If the realtively cheap bailout of greece almost got voted down then I dont see how a spanish bailout would ever get approved. so if they announce this and it jumped id use it as an opportunity to short euro en masse.

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  • Comment Link overthetop Wednesday, 16 June 2010 22:49 posted by overthetop

    hey guys,

    last week I picked up some sept. and dec put options on PCY. I think its a good way to hedge alot of the sovereign debt problems perking up. look at its holding and you will see its an easy way for most investors (those without access to cds trading) to bet on coming haircuts, with almost no volatility priced into these things.

    just thought id post a way to trade some of this news

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  • Comment Link shaunsnoll Wednesday, 16 June 2010 10:42 posted by shaunsnoll

    I have to wonder if the markets would actually trade up on a bailout? I think the markets would absolutely implode on a debt "restructuring" (default) though.

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  • Comment Link Reggie Middleton Wednesday, 16 June 2010 10:03 posted by Reggie Middleton

    They are now.

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  • Comment Link vtholay Wednesday, 16 June 2010 09:28 posted by vtholay

    The pdf link 'Leveraged European Entities from a Sovereign Risk Perspective – retail' is not working..

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