Size of Spain bailout growing by multiples of original estimate

Confirming your humble blogger's predictions, the Telegraph is reporting that a bank by bank stress test shows that the size of Spain's bailout is increasing by multiples of the initial estimate.

There is nothing surprising about the rapid growth in the size of the bank bailout as the country has 25% unemployment and 10% of the banks 1.5 trillion euros in loans are recognized as non-performing.

Pretending that the losses did not exist has simply been destroying the credibility of the last two Spanish governments.

Regular readers know that Spain's modern financial system is designed not to need a bailout.  Because of deposit guarantees and access to ECB funding, the banks can absorb the losses on their exposures to bad debt and continue to operate and support the real economy.

However, if the Spanish banks perform as they are designed, this forces the German and French banks to perform as they are designed.  This means that these banks will also have to take losses on their Spanish exposures.

By trying to force the Spanish government to recapitalize its banks, the German and French governments are trying to prevent their own banks from performing as they are designed and taking losses.

Why would the German and French governments intervene and protect their banks from taking losses?

To preserve their bankers' bonuses.

A bank-by-bank test of financial stability due on Friday is expected to conclude that Spain's lenders are dangerously over-burdened with toxic debts and need to be recapitalised, restructured or shut down. 

The stress test is expected to show a dramatic deterioration since the previous tests were carried out at the beginning of the summer which suggested a €60bn cash injection would be the worst-case scenario. 

Nomura Global Economics said in a note: "Our initial reaction to the publication of those estimates has been negative. The announced figures are well below the market expectations, which start at around €100bn, and, in our view, not only fall short of bolstering market confidence but may actually increase the risk of Spain losing market access." ...

Regular readers know that the only way for Spain to restore market confidence is by requiring that its banks provide ultra transparency and disclose on an ongoing basis all of their current global asset, liability and off-balance sheet exposure details.

It is only with this information that market participants can independently assess each bank to determine which banks have the capacity to rebuild book capital levels after recognizing all their losses and which banks need to be shut down.

It is only with this information that market participants can exert discipline on each bank to recognize all of their losses today and clean up all of their troubled exposures as quickly as possible.

It is only with this information that market participants can exert discipline on each bank and restrain future risk taking.

But last week, the economic crisis was eclipsed by a potentially explosive fall-out between Madrid and one of its biggest regions, Catalonia. The escalating row, over power and taxes, has led to experts warning of violence and even civil war in Spain.

In a dramatic move, Catalonia's ruling parties sought guidance from Brussels on the legality of secession from Spain, requesting a "route map" for membership of the European Union and the euro as an independent state. 

Foreign minister Jose-Manuel Garcia-Margallo responded by calling Catalan secession "illegal and lethal". He warned that Spain would use its veto to stop the region of Catalonia becoming an EU member "indefinitely".... 

 Artur Mas, the Catalan leader, said last week: "Catalonia will follow its path. We have no enemies but we will build our own project as a country."

In short, Catalonia doesn't want to pay for banker bonuses in Germany.