The Growing Pain in Spain

Just when you think that things can get no worse in Spain, they do. Take a look at this chart, courtesy of Credit Suisse via FT’s Alphaville

Yiagos Alexopoulos at Credit Suisse estimates that Spanish capital outflows are currently running at an annualised rate of 50 per cent of GDP. No question, the bank run is clearly accelerating, and one can easily understand why. The country is turning into a Little House of Economic Horrors. The alleged “rescue” of Madrid’s banks is a non-starter. 100 billion euros won’t begin to cover the scale of the problem on any honest accounting or “stress test” (and that’s before we get to the next phase of announced austerity measures).

Chuck Davidson of Wexford Capital has completed a report where he looked at the Spanish banks, extrapolating to all of them from a close look at the big five.. He haircutted their assets by 25%, which hardly seems excessive. Moving from the big 5 to the entire banking system, he came up with 990 billion euros as the capital needed to get Spain’s banks to Basel 3 risk weighted capital standards. Madrid, we have a problem!

That’s of course after these very same banks have ripped off thousands of depositors, who were strongly encouraged to buy preferred equity shares and subordinated debt, which were touted to them as higher yielding, low risk fixed income replacements instead of lower yielding deposits

As Ed Harrison of has noted in a recent post (

“When the banks tried to get private funding, universally they were unable to get institutional and or foreign investors onboard. Bankia, for example, wrestled with whether to pull its IPO altogether after receiving a tepid response from institutional investors. Instead, Bankia went ahead with the IPO, getting the money from Spain’s retail investor base. Other banks raised money by unethically and potentially illegally pressuring bank depositors into preferred equity and subordinated debt instruments they did not fully understand. Reuters says, for example, that 62% of sub debt holders in Spain are also depositors at the same institutions.”

To help fund these bailouts, Spanish PM Mariano Rajoy is continuing to propel the country toward national economic suicide via more ruinous fiscal austerity measures. He has just increased the sales tax from 18% to 21%. This in a country with 25% unemployment, 50% youth unemployment and collapsing retail sales.

That will raise a ton of revenue, NOT!

Who needs to get the Troika to force fiscal austerity on you, when you’ve got Spanish quislings perfectly happy to do the job themselves?

As market participants are coming to recognize the extent and gravity of the bank run (of which Spain is surely the weakest and most dangerous link) and its dire implications for the ECB, Europe’s capital outflow is likely to intensify further, especially given the paltry response from last week’s umpteenth summit to “save the euro” and the mounting legal challenges in Germany to any form of euro-wide deposit insurance. In regard to the latter, it is entirely plausible that Germany’s Constitutional Court rules that the ESM itself (now under legal challenge) is ruled unconstitutional by German law which would put paid to any Eurozone wide solution to the bank run.

If so, the euro should fall precipitously despite today’s unprecedented spec short position. The recent adverse price action in the euro suggests the capital outflow from Europe may be intensifying because market participants are coming to realise that the odds of a euro exit by one or more countries are increasing and political obstacles will probably prevent an effective policy response like deposit insurance to arrest Europe’s bank run and capital outflow.

Given the prospect for policy paralysis ahead, we should expect a continued capital outflow of the kind now manifesting itself in Spain. That outflow should strain the recent efforts of the ECB to retard depreciation of the euro and alert even more participants to the euro’s truly rickety foundations.

This post originally appeared at New Economic Perspectives and is posted with permission.

6 Responses to "The Growing Pain in Spain"

  1. barf   July 12, 2012 at 9:19 pm


  2. Aegean1972   July 13, 2012 at 1:41 am

    Spain has been in recession for a few years now. High unemployment, real estate buble, etc. Now they are JUST STARTING with the austerity measures and that can only mean one thing. Depression and major social unrest.

    If you wanna see what Spain and Italy will look in 1-2 years from now, all you gotta do is look at Greece. Broke, exhausted (from the hard austerity measures), without hope for the future and with hundreds of thousands of new unemployed every month.
    It will take years for them to pick up.

    You dont have to be a nuclear scientist to figure out what enforcing the same recipe to Spain and Italy will mean..

    Bureucratic Europe failed to organize/unite itself (politically and financially) 20 years ago. And then the 2008 crisis came along… Now they re trying to catch up the lost time, by squeezing 20 years of work into 5 and with a hard recession on top…Almost impossible.

    Depreciation of the euro (to 1$/1E) and printing a few trillions would be a good start. Forget about inflation for now. Your first concern should be for the patient to survive.

  3. sierra7   July 13, 2012 at 8:38 am

    Et Tu United States!

  4. Matt Dubuque   July 14, 2012 at 8:59 am

    I object to the intro "just when you think things could get no worse in Spain" to introduce your piece.

    I never thought such a thing; it is obvious this is ONLY the very beginning.

  5. Tom   July 15, 2012 at 11:12 am

    I second Matt's comment.

    Also, I can't make any sense of the chart from CS and there's no explanation. It looks like double-counting, adding the financial account to its components.

  6. here   August 13, 2012 at 7:40 am


    By reading this blog i understand the actual situation in SPain and other European countries especially at this time of recession everywhere. Its sad to know that even banks are not so helpful. I stumbled on this page when I was reading a tech site.