Wednesday, April 11, 2012


This morning, one of the talking heads declared that any financial crisis in Spain is not a sovereign debt crisis but  a banking crisis and Santender and Bilbao, "Are not going to fail."  Ok, fair comment but in these times when does a banking crisis become a sovereign crisis (if ever) or when does the reverse become a reality?

As we have pointed out time and again capital is not the most important thing for a bank; liquidity is.  Capital is probably a finite number based on an evaluation of a portfolio but liquidity is and ongoing thing.  Liquidity is 100%.  When you own the printing press as a sovereign it is a simple decision as to what inflationary risk one wishes to absorb in order to provide domestic liquidity.  When you do not and must rely upon increasing debt issuance to provide liquidity or are faced with banks who denominate their liabilities in a currency other than the currency used  by the sovereign (Dollars vs. Euros), the decision becomes a good deal more complicated.  And that is precisely what Spain now faces.  Spain's major banks are heavily involved internationally with divergent risk portfolios of both a political and currency nature.  It is a far more complex risk situation than Greece...farmore.  Moreover, because of the geographical diversity, understanding the risks and from an observer's standpoint,  attempting to assess the valuation assessments made by the banks themselves or the Spanish financial authorities is an almost impossible task.  Keep in mind there hasn't been a stress test in Euroland for the past few years that has been worth a damn.

The government is in a very tight spot.  All commentary has been directed towards the austerity messures that are being undertaken but market makers and the bond guys aren't looking there; they are looking at bank funding and whether the banks will be able to provide liquidity which will undoubtably be needed for any kind of growth scenario not to mention an ability to roll over clients obligations certainly through this year and probably next year as well.  The foreign operations are a mere guess at the present time.

So you tell me if the debt crisis is back or are we merely afraid of a myth.  I don't like what I am witnessing and I'm afraid that we are going to see a deterioration in the financial stock of the Union in the next month.  With Portugal and Ireland too small to matter, Greece effectively gone and Italy a bit too complicated, the markets have picked Spain as the next crisis point.  If you disagree, let me know.

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