Thursday, December 2, 2010

The Fed's dodgiest deals

MMM in reading this and thinking back to all the fuss that the fed was printing money and how it could not be sustained, it would appear that the govt made quite a profit. If they are also playing the currency game then there are more windfalls on the way!

Aivars Lode

The Fed's dodgiest deals
Posted by Colin Barr
December 1, 2010 5:47 pm

After Lehman Brothers failed, the Fed pulled out the stops – and took in some junk.

Documents released Wednesday by the Federal Reserve detail how the central bank extended trillions of dollars in credit to global banks during the crisis of 2008-2009 to keep the system afloat.

Knows risky business

Initially the loans were secured by investment-grade bonds and other high-grade collateral. But after the failure of Lehman threatened the global financial system, the Fed changed the rules to accept junk-rated debt as well.

There's no sleight of hand going on here. The Fed publicly announced the changes in September of 2008, saying it made them to create a substitute for the triparty repo financing system that collapsed during the crisis.

But by taking lower-rated bonds, the Fed exposed itself to a greater risk of losses. Those losses didn't ensue, but a default by a borrower using low-rated collateral could have hit the central bank's reputation, which by now has been under attack more or less continuously for three years.

"We took an enormous amount of risk with the people's money," Dallas Fed President Dick Fisher (right) said Wednesday. But "we didn't lose a dime and in fact we made money on every one of them."

Among the main channels the Fed used to support the system was the Primary Dealer Credit Facility, which the central bank created in the spring of 2008 following the implosion of Bear Stearns. The PDCF gave nonbank broker-dealers access to emergency Fed funding in parallel with the discount window used by Fed-supervised commercial banks.

Loans made under the PDCF were secured by collateral and discounted to protect the Fed from risk of loss should it have had to sell collateral in the event of a default. Initially the Fed accepted only investment-grade collateral, but that rule went out the window with the failure of Lehman on Sept. 15, 2008, and the Fed then expanded the eligibility rules to qualify so-called junk-rated bonds.

A look at the data published Wednesday by the Fed shows that the 10 PDCF loans secured by the lowest-rated bonds – those ranked triple-C or lower by S&P – included $21 billion of such low-grade collateral.

While the rating agencies have not exactly distinguished themselves during this crisis, even critics acknowledge that taking bonds with low ratings carries some not inconsiderable risk.

"I don't pay much attention to the rating agencies," said Ken Hackel, an investor and author of a cash flow analysis book. "But the correlation between ratings and defaults is strong."

There were $111 billion of loans in the group, made to three borrowers: Citigroup (C) (five times), Bank of America (BAC) (four times) and Morgan Stanley (MS) (once). The loans were secured by $119 billion of collateral – meaning the triple-C-rated bonds comprised 18% of the assets backing the loans.

The banks applauded the Fed for standing behind them.

"The programs offered were meant to provide liquidity backstops as well as instill confidence in the market," Citi said. "They achieved these goals. Citi's usage of these programs was appropriate at the time."

"As we have previously disclosed, Morgan Stanley utilized some of the Federal Reserve's emergency lending facilities during a time of immense financial turmoil throughout the banking sector and the broader market," Morgan Stanley said. "Its actions were timely and critical, and we commend the Fed for providing liquidity and stabilizing the financial system during that period.''

And Bank of America? It couldn't say enough for the Fed.

The funding and guarantee programs were an example of a successful government initiative at no taxpayer expense. The programs enabled the U.S. financial system to continue to operate, preventing a recession from becoming much more severe. Bank of America and its peers participated in these programs to various degrees and paid the government for the borrowings and guarantees. The programs helped our customers such as borrowers, auto dealers, depositors and money market fund investors continue to do business as usual despite virtually unprecedented disruptions in the financial markets. We have repaid, with interest, all of the our debt securities issued with the government guaranty as they have matured with the exception of those debt securities whose terms have not matured. All such debt securities mature no later than June 2012, and we fully expect to pay those debt securities as they become due.

Who says the bankers aren't grateful for their taxpayer support?

What's bugging gold?

MM the last line in this article states that gold may drop more! Some of you may remember that gold follows the path of many other commodities, at some point after hitting a record high a record crash occurs.

Aivars Lode

What's bugging gold?
Posted by Colin Barr
November 29, 2010 6:41 am

Gold usually shines in a crisis. But thanks in large part to changing views of China, the problems swirling in Europe and Korea have barely budged gold prices.

In just the past week, Ireland has been forced to take a bailout, Portugal has claimed it doesn't need any money and Spain has warned that speculators who bet against its bonds are cruising for a bruising. Oh, and North Korea started shooting at South Korea.

Gold vs. Chinese stocks

None of these events serves to make the globe look safer for investors or anyone else, for that matter. Yet gold, which has been known over the years as the go-to investment at times of distress, hasn't caught fire, in contrast to its breakouts in some earlier crises.

Gold futures for December delivery recently fetched $1,362 an ounce. That's down more than 3% from last month's nominal record above $1,400.

Part of the answer no doubt lies in the breakneck pace of gold's rally this summer. The price soared some 20% between late July, when investors began anticipating a new round of Federal Reserve aid, and early November, when the Fed announced the launch of the second round of quantitative easing. After that runup, even longtime gold bulls were heard predicting a pullback

But another explanation centers on a changing view of China's role in the global economy and financial markets.

This summer, demand from the world's fastest-growing big economy was seen as an irresistable force driving a global commodity price spike. China's thirst for growth and its demand for natural resources would spur a multiyear boom in markets for food, agricultural products, metals and other goods.

But now, facing worrisome food price inflation, China is tightening monetary policy in an effort to quell some of that demand. It has tightened bank reserve requirements twice this fall, and is expected to do so again in coming months.

With China and other emerging economies trying to keep a lid on the hot money surging in from slow-growing rich countries, the one-way bet on rising global commodities prices is suddenly looking like much less of a sure thing.

"Chinese tightening poses a negative for the 'risk trade' via the potential of hampering demand for commodities," writes CMC Markets strategist Ashraf Laidi. "In contrast, last spring's Greece crisis was a green light to buy gold" against both the dollar and the euro.

None of this is to say the green light for buying gold won't come on again. The dollar has rallied strongly against the euro in recent weeks as the Irish crisis has come to a head, and any success in defusing problems there may reignite the sell-the-dollar trade. At the same time, an escalation of either the European or Korean crises could spur new gold buying.

It is far from clear that the monetary moves China has made will be enough to cool down its economy or trim demand for commodities.

And over the longer haul many of the dynamics that have accompanied gold's rise remain in place. China and other developing world cental banks are buying gold to diversify their dollar and euro holdings; negative real interest rates, which have a strong link to a rising gold price, appear likely to remain in place in the West for some time.

But if nothing else, the past month has offered a reminder that no trade goes one way forever -- which means the gold pullback, as unexpected as it has been, could yet go much further.

Wednesday, December 1, 2010

Here's another reason to spend the kids' inheritance

Great headline, here we go again the same story so demand for copper increasing because of electrification forcing the prices up because supply is constrained.
Lets watch how long it takes for the price to run up and collapse as they found new reserves so there is no longer the shortage reported here.

Thanks Dad for the article.

Aivars Lode

Here's another reason to spend the kids' inheritance
Barry FitzGerald
December 1, 2010 - 9:17AM

Bullish predictions on the price outlook for copper are a dime a dozen. It makes you wonder why people aren't cashing in their kid's endowment policies and loading up with copper, or at least producers of the red metal.

The reasons for the raft of bullish price predictions are well known. It's all about the growth in demand caused by the electrification of the emerging economies at a time of falling grades and reserves pressure at established mines, and the increasing number of approvals roadblocks faced by new projects.

London-based metals consultancy GFMS is one of the latest to outline a rosy future for copper. It reckons that apart from the impact on demand/prices from an economic slowdown in the first half of 2011, it will be a case of onwards and upwards thereafter.
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So much so that GFMS is prepared to predict that copper prices will rally from the first half of 2011 setback to prices “well above” $US11,000 a tonne in 2013. That's more than 30 per cent from where the copper price currently sits.

Societe Generale's analysts have also chipped in, saying the rise of exchange-traded (metals) funds, and the resultant diversion of metal away from end users of the stuff, means that copper prices are likely to rise "significantly".

Local exposure to copper comes with the big three of the metal on the ASX – BHP Billiton, Rio Tinto and OZ Minerals. But as you might suspect, Garimpeiro's interest is in the more leveraged plays to the copper boom we keep getting told is unfolding.

BHP and Rio will do well out of a 30 per cent-plus rise in copper prices over the next three years. But who knows, over supply in iron ore might see them hit by tanking iron ore prices. That leaves OZ as the pure producer play. But it has to sort out what it is going to do with its cash pile of some $1.5 billion before we'll know what it will look like in 2013, or next year for that matter.

So it’s back to the developers like Sandfire or Rex Minerals, or Garimpeiro’s personal preference, the explorers, particularly those with unfolding leverage to the price spike we’re told is coming.

Gold Coast-based Coppermoly falls in to that category. Garimpeiro had a look at the stock back in July when it was trading at 13 cents a share for a market capitalisation of a little more than $17.2 million.

On Tuesday it was a 14.5 cent stock worth $20 million on an undiluted basis. Not exactly a stellar share price performance. But there is a fair chance interest in the stock will build in the months ahead in response to a flow of exploration results from its joint venture with the world’s biggest gold producer, Canada's Barrick Gold, on New Britain island in Papua New Guinea.

Earlier this year Barrick started a drilling program on Coppermoly’s tenements on the island that are subject to a joint venture agreement under which Barrick can earn a 72 per cent interest by spending $20 million.

Results from the first of the holes drilled have been impressive. The most recent result – from the third hole drilled by Barrick in to the Nakru property (it was the first by Barrick in to the smaller Nakru 2 geophysical anomaly) – was released last week.

The hole returned a 64 metre intersection grading 0.59 per cent copper from 141 metres depth, including a 10.2 metre intersection grading 1.59 per cent copper. A separate lower interval returned 4.9 metres grading 13.6 per cent zinc, 0.85 per cent copper, 0.41 grams of gold a tonne and 24.03 g/tonne silver.

All very interesting, particularly as Nakru is a four-hour drive along logging tracks from the deepwater port at the provincial capital of Kimbe. More drill results from already completed holes will be released as they are received from the assay lab. They could be worth watching out for, as will Coppermoly’s need to top up its cash position.

At last count it was down to $2 million.

Monday, November 29, 2010

It is the greatest and most successful pseudoscientific fraud I have seen in my long life as a physicist

Years ago I was questioning the whole climate gate thing based upon things I had learn't observed over the years. Thank Mac for the contribution.

Aivars Lode

October 9th, 2010 4:54
Professor Emiritus Hal Lewis Resigns from American Physical Society

The following is a letter to the American Physical Society released to the public by Professor Emiritus of physics Hal Lewis of the University of California at Santa Barbara.

Sent: Friday, 08 October 2010 17:19 Hal Lewis

From: Hal Lewis, University of California, Santa Barbara
To: Curtis G. Callan, Jr., Princeton University, President of the American Physical Society

6 October 2010

Dear Curt:

When I first joined the American Physical Society sixty-seven years ago it was much smaller, much gentler, and as yet uncorrupted by the money flood (a threat against which Dwight Eisenhower warned a half-century ago).

Indeed, the choice of physics as a profession was then a guarantor of a life of poverty and abstinence—it was World War II that changed all that. The prospect of worldly gain drove few physicists. As recently as thirty-five years ago, when I chaired the first APS study of a contentious social/scientific issue, The Reactor Safety Study, though there were zealots aplenty on the outside there was no hint of inordinate pressure on us as physicists. We were therefore able to produce what I believe was and is an honest appraisal of the situation at that time. We were further enabled by the presence of an oversight committee consisting of Pief Panofsky, Vicki Weisskopf, and Hans Bethe, all towering physicists beyond reproach. I was proud of what we did in a charged atmosphere. In the end the oversight committee, in its report to the APS President, noted the complete independence in which we did the job, and predicted that the report would be attacked from both sides. What greater tribute could there be?

How different it is now. The giants no longer walk the earth, and the money flood has become the raison d’ĂȘtre of much physics research, the vital sustenance of much more, and it provides the support for untold numbers of professional jobs. For reasons that will soon become clear my former pride at being an APS Fellow all these years has been turned into shame, and I am forced, with no pleasure at all, to offer you my resignation from the Society.

It is of course, the global warming scam, with the (literally) trillions of dollars driving it, that has corrupted so many scientists, and has carried APS before it like a rogue wave. It is the greatest and most successful pseudoscientific fraud I have seen in my long life as a physicist. Anyone who has the faintest doubt that this is so should force himself to read the ClimateGate documents, which lay it bare. (Montford’s book organizes the facts very well.) I don’t believe that any real physicist, nay scientist, can read that stuff without revulsion. I would almost make that revulsion a definition of the word scientist.

So what has the APS, as an organization, done in the face of this challenge? It has accepted the corruption as the norm, and gone along with it. For example:

1. About a year ago a few of us sent an e-mail on the subject to a fraction of the membership. APS ignored the issues, but the then President immediately launched a hostile investigation of where we got the e-mail addresses. In its better days, APS used to encourage discussion of important issues, and indeed the Constitution cites that as its principal purpose. No more. Everything that has been done in the last year has been designed to silence debate

2. The appallingly tendentious APS statement on Climate Change was apparently written in a hurry by a few people over lunch, and is certainly not representative of the talents of APS members as I have long known them. So a few of us petitioned the Council to reconsider it. One of the outstanding marks of (in)distinction in the Statement was the poison word incontrovertible, which describes few items in physics, certainly not this one. In response APS appointed a secret committee that never met, never troubled to speak to any skeptics, yet endorsed the Statement in its entirety. (They did admit that the tone was a bit strong, but amazingly kept the poison word incontrovertible to describe the evidence, a position supported by no one.) In the end, the Council kept the original statement, word for word, but approved a far longer “explanatory” screed, admitting that there were uncertainties, but brushing them aside to give blanket approval to the original. The original Statement, which still stands as the APS position, also contains what I consider pompous and asinine advice to all world governments, as if the APS were master of the universe. It is not, and I am embarrassed that our leaders seem to think it is. This is not fun and games, these are serious matters involving vast fractions of our national substance, and the reputation of the Society as a scientific society is at stake.

3. In the interim the ClimateGate scandal broke into the news, and the machinations of the principal alarmists were revealed to the world. It was a fraud on a scale I have never seen, and I lack the words to describe its enormity. Effect on the APS position: none. None at all. This is not science; other forces are at work.

4. So a few of us tried to bring science into the act (that is, after all, the alleged and historic purpose of APS), and collected the necessary 200+ signatures to bring to the Council a proposal for a Topical Group on Climate Science, thinking that open discussion of the scientific issues, in the best tradition of physics, would be beneficial to all, and also a contribution to the nation. I might note that it was not easy to collect the signatures, since you denied us the use of the APS membership list. We conformed in every way with the requirements of the APS Constitution, and described in great detail what we had in mind—simply to bring the subject into the open.

5. To our amazement, Constitution be damned, you declined to accept our petition, but instead used your own control of the mailing list to run a poll on the members’ interest in a TG on Climate and the Environment. You did ask the members if they would sign a petition to form a TG on your yet-to-be-defined subject, but provided no petition, and got lots of affirmative responses. (If you had asked about sex you would have gotten more expressions of interest.) There was of course no such petition or proposal, and you have now dropped the Environment part, so the whole matter is moot. (Any lawyer will tell you that you cannot collect signatures on a vague petition, and then fill in whatever you like.) The entire purpose of this exercise was to avoid your constitutional responsibility to take our petition to the Council.

6. As of now you have formed still another secret and stacked committee to organize your own TG, simply ignoring our lawful petition.

APS management has gamed the problem from the beginning, to suppress serious conversation about the merits of the climate change claims. Do you wonder that I have lost confidence in the organization?

I do feel the need to add one note, and this is conjecture, since it is always risky to discuss other people’s motives. This scheming at APS HQ is so bizarre that there cannot be a simple explanation for it. Some have held that the physicists of today are not as smart as they used to be, but I don’t think that is an issue. I think it is the money, exactly what Eisenhower warned about a half-century ago. There are indeed trillions of dollars involved, to say nothing of the fame and glory (and frequent trips to exotic islands) that go with being a member of the club. Your own Physics Department (of which you are chairman) would lose millions a year if the global warming bubble burst. When Penn State absolved Mike Mann of wrongdoing, and the University of East Anglia did the same for Phil Jones, they cannot have been unaware of the financial penalty for doing otherwise. As the old saying goes, you don’t have to be a weatherman to know which way the wind is blowing. Since I am no philosopher, I’m not going to explore at just which point enlightened self-interest crosses the line into corruption, but a careful reading of the ClimateGate releases makes it clear that this is not an academic question.

I want no part of it, so please accept my resignation. APS no longer represents me, but I hope we are still friends.


Harold Lewis is Emeritus Professor of Physics, University of California, Santa Barbara, former Chairman; Former member Defense Science Board, chmn of Technology panel; Chairman DSB study on Nuclear Winter; Former member Advisory Committee on Reactor Safeguards; Former member, President’s Nuclear Safety Oversight Committee; Chairman APS study on Nuclear Reactor Safety Chairman Risk Assessment Review Group; Co-founder and former Chairman of JASON; Former member USAF Scientific Advisory Board; Served in US Navy in WW II; books: Technological Risk (about, surprise, technological risk) and Why Flip a Coin (about decision making)

For Europe’s Future, Spain Is All That Matters

Once again more drama in Europe, when the Euro was really strong the reason for its strength was that Europe did not have the debt issues that the US did! So how long before the Euro weakens against the USD?

Thanks Danie for the article. Aivars Lode

For Europe’s Future, Spain Is All That Matters
by Gonzalo Lira

Tuesday, November 23, 2010

Last Spring it was Greece that was in crisis mode—then last week, it was Ireland—and coming up next is Portugal—but all those pale in comparison to Spain.

That’s gotta hurt.
If I had to bet on which country will bring about the end of the Euro—and perhaps even the end of the European Union—I’d have to say it’s Spain.

Right now, no one is talking about Spain—Spanish spreads are as quiet as a guilty man in a police line-up—everyone’s too concerned over Ireland, and the upcoming Portuguese Situation.

But Spain is the key—Spain is what you should be paying attention to, if you want to find out what will happen to the European Monetary Union (EMU), and the European Union (EU) itself.

Ireland got into trouble with the Euro bond markets after German Chancellor Angela Merkel made some not-very-clever remarks about Irish bond-holders needing to take some haircuts. The bond markets started to panic—yields on Irish debt started to widen—and then once again, it’s Sovereign Debt PanicTime™ (patent pending).

The EU in conjunction with the European Central Bank (ECB) and the International Monetary Fund (IMF) put together a rescue package—but the Irish refused to take it, as they realized they would have to give up some of their hard-won sovereignty in exchange for this lifeline. To accede to this package, they’d likely have to slash government expenditures, take on “austerity measures”, and likely raise their precious 12.5% corporate income tax rate, which has been the carrot the Irish have used to get so much foreign investment over the last decade.

But the Irish deterioration in the bond markets began to pick up speed—finally on Sunday night, after a week of dithering, Irish Prime Minister Brian Cowen officially asked the European Union for a bail out.

(A quick explanation for the layman, as to why the bond markets are so important: Because Ireland is running a deficit, it needs to sell bonds—that is, borrow money—in order to finance its fiscal shortfall. If the bond markets do not have much faith that Ireland will pay back the bonds it emits, then the price of Irish bonds will go lower, which means the yields will go higher. In other words, Ireland will be forced to pay more for the money it is borrowing. The more it has to pay to borrow money, the greater the deficit, until finally, you get to the point where you cannot borrow enough to cover your deficit: In other words, you go broke. This was what was happening to Ireland, in simplified terms.)

Just like they did with Greece, the European officials colossally fucked up the bail-out package for Ireland. It turns out that—far from having put together a detailed package that could be swiftly implemented, and thereby restore confidence—the EU/ECB/IMF troika have only a flimsy framework for the Irish bailout. The vaunted European Financial Stability Facility? It’s not even fully funded yet!

So on Monday, the markets were jubilant—“Ireland is saved! Crisis averted!”—but then today Tuesday, they’re down in the dumps, as it is becoming increasingly clear how unprepared the European officials are. Their “rescue package” is vague on the details—to put it mildly.

Coupled to that, the bail-out announcement sparked a political fire-storm in Ireland—Cowen’s coalition partners, the Green Party, exited the government, and elections are now scheduled for January. There are even calls from Cowen’s own party for his immediate resignation.

This is bad enough—so what does the IMF go and do? Why, with exquisite political tone-deafness, it sends the clear message that Ireland is going to have to crawl if it wants the bail out: John Lipsky, a muckety-muck in the IMF, says to Reuters that “our work there [in Ireland] is technical, not political. Decisions have to be made by [the Irish] government.” In other words, the IMF isn’t going to negotiate with Ireland—it’s going to dictate.

Or in other words, the IMF is saying, Beg for the money, you Irish bitches!

So any effective clean-up of the Irish situation is going to take a while—assuming it actually happens. And just like the Greek bail-out last spring, it will be messy messy messy: Half-measures, dithering, “adjusted” figures, until finally the European officials wind up throwing twice as much money at the problem as originally expected. We might as well call the movie now playing in Dublin, Doin’ It Greek, Part II: Ireland!

To add insult to injury, all this politico-economic theater didn’t staunch what most worried the EU and the ECB: Contagion.

All the smaller, weaker European economies in the EMU are in the same boat as Ireland: They are all insolvent. Not just the PIIGS—Portugal, Ireland, Italy, Greece, and Spain—but also Belgium, and maybe even France, if we steel ourselves and look at the numbers.

Right now, though, contagion has reached Portugal—the next-weakest link in the European Chain:

Portuguese debt yields are widening by about 50 basis point this morning, to 4.328% over the German bunds (10-year)—even after the Portuguese government implemented a second austerity package this past October, following their May spending cuts which did not convince the bond markets.

That’s because the Portuguese have a huge fiscal deficit: 9.4% of GDP. They are cutting spending, and they are raising taxes too—but still, their bond yields are rising: The market doesn’t think that Portugal will make it through this crisis intact. Just like Greece, just like Ireland, the Portuguese will need to be bailed out.

And so that clears the way for the bond market’s anxieties to focus on the real elephant in the drawing room:


According to IMF numbers for 2009, the gross domestic product of Greece was $331 billion, Ireland was $221 billion, and Portugal was $233 billion—

—but Spain’s GDP in 2009 was $1.468 trillion. Roughly twice Greece, Ireland and Portugal combined. In other words, close to half of Germany’s GDP.

And what is Spain’s fiscal deficit? Last year, it was officially 7.9% of GDP—twice the EU limit. Not Irish or Portuguese or much less Greek numbers, but still up there—officially.

Why do I say “officially”? And now put “officially” in scare quotes? Because of a very disturbing anonymous paper, released last September 30.

Written by a local economist, it basically said that the Spanish GDP numbers for 2009 were cooked—and then went ahead and showed the whys and hows of this analysis. FT Alphaville originally ran the piece—and it was picked up by everybody, freaking everyone out. But then Alphaville up and retracted the paper under political pressure, excusing their cowardice by saying “life is too short”.

(BTW, something similar happened to me with Henry Blodget’s Business Insider, when I pointed out Paul Krugman was essentially advocating war as a fiscal stimulus solution: They put out my piece, then retracted it like a pussy-whipped house-husband. A lot of blog sites claim they “fearlessly tell the truth”—but when push comes to shove, a lot of the people running these blogs have no balls.)

The anonymous Spanish paper gave a credible analysis, which I for one believe. And considering the shit going on in Greece, regarding faked GDP data—and knowing the Spanish—I wouldn’t be a bit surprised that Spanish GDP figures have been faked in Madrid, in order to keep everything copacetic.

But even if they haven’t been, it’s not as if the official numbers are painting a rosy picture: Spain has nearly 20% unemployment, near 10% yearly fiscal deficit to GDP, and no clear way how to get out of this hole that it is in. So much of Spanish growth over the last decade was fueled by real estate development and over-levaraging, that there’s no clear way forward for the Spanish.

Now, if there is a Greek/Irish-style crisis with Spain—in other words, if there is a run on Spanish debt—how much will the EU/ECB/IMF have to pony up, to bail out Spain?

Let’s look at Greece and Ireland:

Originally it was thought that €45 billion would be enough to bail out Greece—but the final tally for that shindig looks to be something like €90 billion (about $122 billion). At this time, bailing out Ireland is going to come to something similar over the next 3 years—€90 billion—assuming, of course, there aren’t any hidden nightmares in the Irish banking sector, which is the reason Ireland is going under.

In both these cases, essentially three times the yearly deficit was the ballpark figure for the European bailouts.

Therefore, to bail out Spain, and plug up its fiscal balance sheet hole over the next three years would cost €450 billion—minimum. That’s about $600 billion.

Look at that number again—look at it closely, and take your time:

€450 billion.

That’s twice the size of Ireland’s total GDP for 2009.

In order to figure out how much each party would have to shoulder of this €450 billion price tag, Bruce Krasting, in some private e-mail exchanges, thought that the percentages that the EU, the ECB and the IMF were shouldering for the Greek and Irish bailouts could serve as a template.

Fair enough: If we go by Greek and Irish percentages, then roughly a third of that €450 billion price tag to bail out Spain would be shouldered by the IMF—and as everyone knows, the U.S. puts up 20% of IMF money.

So the U.S. would be on the line for €30 billion—$40 billion—to save Spain.

Then Bruce delivered his verdict: “The U.S. is going to say ‘Yes’ to that and ‘No’ to California? No way. Not going to happen with this new Congress.”

BK is one smart customer—I completely agree with his analysis: No way will the U.S. shell out $40 billion to save Spain.

Therefore, the IMF’s participation in a Spanish bail-out will be severely reduced, if not marginal. Therefore, bailing out Spain will be a strictly European affair.

Does Europe have €450 billion to bail out Spain? That is, does Germany have €450 billion to bail out Spain?

No it does not. It does not have the money for such a bailout—and even if it did, it does not have the political will to push through such a bailout.


But even if—by some monumental financial miracle coupled to an equally monumental political miracle—Europe somehow managed to find the money to bail out Spain without depreciating the Euro?

What then?

The Spanish economy won’t be improving any time soon—and neither will the economies of the other smaller countries like Greece, Ireland, Portugal, Belgium. Not when they’re locked into the Euro, and are therefore unable to depreciate in order to spur growth and investment.

See, even if there is the money and the political will to save Spain—which I don’t believe—the only way to bail out Spain in such a way that it has an economic future is to cut it loose from the Euro. If it is kept locked in the EMU, the Euro will become a weight around its neck, dragging its economy down until in a few years, there will be the need for yet another bail out of Spain. That goes doubly so for the smaller countries, like Greece, Ireland, Portugal, Belgium.

Therefore, I believe that if and when there is a run on Spanish sovereign debt, and Spain slips into the position of having to be bailed out like Greece and Ireland, that will be Crunchtime Europe: That will force an inevitable realignment of the European economy, and the European continent.

Best case?

Though they remain in the European Union, the weaker economies exit the EMU and go back to local currencies, which they quickly depreciate, while their Euro-denominated sovereign debts are restructured and paid off over time. The Euro becomes the currency of France, Germany, Holland, Finland and Austria.

Worst case?

I can imagine a number of worst cases, all of them different, except for one thing in common: They’ll all be bad.