Good morning

The headlines:

1. Spain to be bailed out.

   Link: Too big too fail bail?

   Spain is now the 4th eurozone country to request a bailout. For its banks. About 100 billion euro worth.

   Of course, according to Mr Rajoy, this isn’t a bailout. It’s “a credit line” to the banks, and an “endorsement of [his] policies” – he said, before flying off to Poland to watch the Spain-Italy match.

   Basically, from what I understand*, the banks will be recapitalised at favourable rates of interest**.

   The real complaint from the Official masses is the length of time that this has taken. Since the collapse of the Spanish real estate boom in 2008, the Spanish government has attempted to fix its financial system at least four times – by encouraging mergers, forcing the creation of larger provisions, lying***, and doing everything but appeal for outside assistance.

   This has led to the market assuming that the Spanish Treasury doesn’t know what it’s doing. Which has led to higher than necessary interest rates. Or, as the IMF puts it, the “gradual approach” has caused the weaker banks to undermine financial stability.

   Fail.

2. Spanish bondholders will no longer be preferred.

   Link: It’s what happens when you fail bail.

   This is really just a carry-over from Greece. If the money for the bailout comes from the ESM (European Stability Mechanism), the fiscal treaty gives it preferred creditor status – behind only the IMF. If the money comes from the EFSF****, then the EFSF isn’t technically a preferred creditor – but Finland will demand collateral, which will make the EFSF a preferred creditor anyway.

   Why is this important? Because it puts bondholders in a higher risk position than before. Higher risk gets higher return demands, which will make Spanish public debt refinancing more expensive.

3. Hollande may need anti-capitalist support to win parliament.

   Link: does anyone understand the French political system?

   The two-round vote began yesterday and ends on Sunday. While the Socialist party is expected to have the nominal majority, it may require a coalition with the legislative “fringe” in order to have parliamentary majority.

4. The US Fiscal Impasse will stay impassed until after the election.

   Link: Luckily <insert sarcasm> that’s only until November.

   That’s a prediction from US House Budget Committee Chairman Paul Ryan. As everyone should be aware, the US faces its “fiscal cliff” come January 1. The Bush-era tax cuts expire, and the automatic spending cuts kick in.

   This is bad.

   A $1 trillion spending cut works out to around a third of US government annual spending. The fiscal shock of that kind of cut would be catastrophic – I mean, I’m all for spending cuts, but anything that dramatic would cause unnecessary and unmanageable market reactions. Not to mention the indirect impact it will have on the satellite industries that depend on government spending to maintain their business.

   If the fiscal cliff is awaiting presidential results in November, that only gives a month for a solution to be agreed upon. And when you consider how religiously the Senate and the House of Representatives take their seasonal holidays… Maybe two weeks, tops.

   I have been doing some research on the American fiscal cliff. Expect it in a featured post sometime this week.

5. China’s surprise statistics.

   Link: Trade surplus, domestic slowdown.

   Chinese exports grew at double the pace expected by analysts, while industrial output and retail sales figures were trailing said pace. This suggests that last week’s interest rate cuts were an attempt to slow down a domestic slowdown.

That’s all for now.

Have a good day.

*Which is always fairly basic…

**3% versus the current 6% that the market is giving to the Spanish government – and obviously, the rate to be given to the banks will be higher. That said – I’m not sure how obvious that really is. Governments usually get lower rates because they’re perceived as having lower risk. Even when a government is backing all the banks – I suppose that’s still true. An individual bank is still more likely to go under than the entire government.

***That’s a strong term for “willful blindness” about the state of the banks.

****Which is all a question of timing – as the ESM should be in place soon. And the EFSF (European Fiscal Stability Facility or something) will be consigned to the annals of Greek history.