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Monday, July 30, 2012

Mailbag; "Bear Trader" writes: More About Spain

Like I said some weeks back Spain needs about 400,000,000,000 Euros to recap the banks. A loan of 100,000,000,000 Euros has been promised. Three times that much is still needed, and not as a loan - unless it is a loan "in name only" - because Spain couldn't pay back that much money at 5% interest in a million years. Maybe the ECB (run by Mario Draghi, by the way; Mario Monti is prime minister of Italy) will just buy Spanish bonds and just never redeem them, just vaporize, incinerate, or put them in a drawer and forget them forever, etc. Spain needs cash to pay off loans, not loans to pay off loans. The ECB will intervene in Spanish bond markets for sure, now, with massive buys that will just murder the shorts, like driving the interest rates of Spanish bonds down from 7.5% to less than five percent long enough, a day or so, to kill the shorts, and then say they will do it again whenever they feel peckish. The message is "you might want to be careful, boys and girls". The Germans are listening now to European "reason" because Greece owes Germany Target2 funds of 692,000,000,000 Euro (which are part of German bank "assets"). As well Germany holds Greek, Spanish, and Italian debt in unknown amounts, probably over 5 trillion Euros, maybe two or three times that amount. Greece leaves the EU, Germany is out 692 Billion Euro in Target2 funds, plus whatever the Greek government owes, plus what all Greek private citizens owe. Call it a round Trillion Euro. A loss of this size would make every German bank, insurance company, and pension fund bankrupt. Throw in Spain and the loss would be something like 7 Trillion Euros. Add Italy and it would be maybe 17 Trillion Euros. The EU would explode into space.

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