Economist and Hedge Fund Manager Shayne Heffernan of takes a look at Spanish Banks

Spain asks EU for EUR60-B Bank Bailout

The Spanish government will formally ask the European Union for a bailout package of up to EUR60-B (US$$77.8-B) to recapitalize its banking sector out of the EUR100-B the EU had offered, reports Expansion in its Thursday Internet edition, citing sources at the Economy Ministry.

But the same sources told the newspaper the government was being prudent as banks will need EUR40-B.

According to a recent audit carried out by Oliver Wyman, the Spanish banks need EUR53.75-B in new capital, but the Spanish government said that a new state-owned “Bad Bank” would reduce final capital needs to some EUR40-B.

Having reviewed the core data from the Banco de Espana I have come to a very different number than the much publicized $76b shortfall in the Spanish banking system, my number is $300b.

Before we get to the raw data lets take a look at the Economic parameters currently defining the Economy of Spain.

Spain’s already terminal debt as a ratio of gross domestic product (GDP) will reach 90.5% by end 2013, according to the document presented to parliament for approval, almost three times that registered before the property bubble burst in 2008, property prices continue to slide and that fall will be exacerbated by high unemployment, chronic over supply of real estate and diminishing international demand. The real ratio by 2012 will be 95% plus.

The budget details spending cuts of 3.1% in health, 14.4% in education and 6.3% in unemployment benefits, as the recession, which began in the first quarter, drags on.

Spain will also slash state funding to commerce, tourism and small, and medium-sized companies by 18.8% and infrastructure by 13.5%.

Unemployment in Spain is more than double the European Union average, with half of all working-age under-26s unable to find jobs and shattered businesses laying off employees they cannot afford to pay. The rate is 25% unemployment rate (the rate is above 50% for those under age 25), for those with job things are not much better with new tax hikes, and new “austerity” spending cuts.

Real Estate: The average price of houses and apartments declined 14.4 percent from a year earlier, the most since the measurement began in 2008.

Using these parameters we would expect a similar rise in bank loan defaults.

With the parameters set lets look at the individual data in the results themselves set out below.

After discounting expected earnings, reevaluating the Real Estate component, taking in to account the bad debts and shrinking economy we arrive at a short fall of $300b (calculations are available to HCM clients).

The $300b number is conservative in my opinion as it does not discount the value of Government Bonds owned by the Banks. In my opinion these do not value as high grade debt, they are at best questionable.

In valuing such instruments in general I am using a discounted rate of 18% to face value, more than fair given the Greek default.

George Soros has spoken about Germany taking a greater role in the European Debt Crisis or leaving the EU.

According to Soros the European Union could be destroyed by the nightmare that the euro crisis has become, and Germany needs to take the responsibility to save the common currency if they can not they have only one alternative, and that is for Germany the eurozone’s biggest economy to simply leave the 17-member currency bloc.

The crisis “is pushing the EU into a lasting depression, and it is entirely self-created,” said Soros, chairman of Soros Fund Management.

“There is a real danger of the euro destroying the European Union,” he said. “The way to escape it is for Germany to accept … greater commitment to helping not only its interests but the interests of the debtor countries, and playing the role of the benevolent hegemon.”

Germany should act as the leader of the union in the same that the United States did for the free world after World War Two, Soros said at a luncheon hosted by the National Association for Business Economics.

Soros floated another solution to the more than two-year-old crisis: let Germany leave the euro. “The problem would disappear in thin air,” as the value of the euro declines and yields on the bonds of debtor countries adjust, he said.

The International Monetary Fund and the finance ministers of some outside countries have put pressure on Germany to do what is needed to save the euro and solve a crisis that has hamstrung the global economy. Germany is at the forefront of the eurozone’s northern creditor countries that are locked in a clash with the bloc’s heavily-indebted southern states over the future shape of the bloc.

Germany again said it was too soon to say that Greece the most troubled of the eurozone’s members needed more time to meet deficit-cutting goals, keeping fears alive that the smaller country could ultimately leave the currency bloc in what would be a messy exit.

Economist Shayne Heffernan from has called the European Master Plan fraud on a massive scale.

The European Central Bank agreed to launch a new and potentially unlimited bond-buying program despite the fact that they are operating with very limited reserves, what does this mean? It means the ECB will begin the biggest Money printing exercise in History according to Heffernan.

“No ex-ante quantitative limits are set on the size of outright monetary transactions,” said Draghi as he readies the printing press.

The more conservative Bundesbank chief Jens Weidmann rightfully had expressed concern that intervening in the bond market would break the ECB taboo of financing euro zone member states. Other ECB policymakers see a greater urgency to stop a collapse in Spain and Italy and prevent the euro zone crisis from deepening.

And is the Money printing was not enough, Draghi tied the whole deal to the IMF Austerity plan that has helped to exacerbate the EuroCrisis, Draghi said the ECB would only help countries that signed up to and implemented strict policy conditions, with the euro zone’s rescue fund also buying their bonds, and preferably with the IMF involved in designing and monitoring the conditions.

But not even Draghi is a believer, he added a clause that preempts further defaults by European States.

Not bad enough yet, don’t worry it gets worse, Draghi said all bond purchases would be “sterilized” by taking in an equivalent amount in deposits from banks to avoid any risk of inflation, from that statement we can conclude Europe’s Banks have unlimited funds to match the unlimited Bond buying.

Asked about ECB bond buying and a conflict of interest between Spain and Germany, Rajoy told Germany’s Frankfurter Allgemeine Zeitung: “It is good to have principles in life. But sometimes it is also good to be flexible.”

And his statement sums it up, this is a trick to disguise the rampant and unlimited printing of Euro, it does not address growth in the region and it back-ends it to the cash strapped banks of Europe, in short it is a new Crisis in the making.

Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reached a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.Read the Terms of Service

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