Hyperbolic Selloff Coming? IMF Discusses Spanish Contingency Plans; Madrid Denies Plans; Hispabonos Dropped From Cabinet Discussion

The latest word of the day is the already approved, then denied, then tabled plan to implement hispabonos was dropped from discussion at Friday's cabinet meeting according to La Vangauardia.

The approval of so-called hispabonos, which will allow the autonomous communities in the markets financed through the state with a lower cost, will be delayed at least a week after the Government has decided not to take it to the Council Ministers tomorrow.

According to government sources, this issue will not be among the topics to be discussed Friday by the Council, although it had considered that possibility.

The Prime Minister, Mariano Rajoy, guaranteed to last Friday CiU spokesman in Congress, Josep Antoni Duran Lleida, the instrument chosen to help the regions would be launched "soon", while government sources explained being worked on the model chosen.

Mish Translation

Prime minister Mariano Rajoy has no idea what to do.

Without hispabonos (central bank guarantees of regional debt) the regional governments are going to have an exceptionally difficult time financing new debt or rolling over existing debt. Yet with guarantees, Spain faces more debt downgrades and higher yields overall.

When you don't know what to do, the default choice is to table the discussion and pray for a miracle.

IMF Discusses Contingency Plans

The Wall Street Journal reports IMF Begins Talk On Spain Contingency Plans

The European department of the International Monetary Fund has started discussing contingency plans for a rescue loan to Spain in the event that the country fails to find the funds needed to bailout its third-largest bank by assets, Bankia SA, BKIA.MC +0.19% people involved in the handling of the Spanish crisis said Thursday.

Both the EU and IMF want to avoid having to bailout Spain at all costs, the people said, but initial planning is under way given that the country is struggling to raise a EUR10 billion shortfall in funds to bail out Bankia. The stakes are extremely high because a three-year rescue loan for Spain could be as much as EUR300 billion, one person said, although any bailout could involve smaller, shorter-term loans.

"A better picture will emerge after the IMF review of the Spanish economy starting June 4," one of the people said. "But thoughts are already being discussed (within the European department)".

"Some say a Spanish bailout is inconceivable, but it's equally inconceivable that preparations are not being made for such an eventuality," the person added.

Spain's Economy Minster Says IMF Rescue Plan is Nonsense

Economy minister Luis de Guindos calls the rescue plan "nonsense" stating IMF report sees 70% of Spanish banks as healthy

Economy minister, Luis de Guindos, has described as "nonsense" that the IMF is preparing a plan if Spain fails to rescue Bankia funding. Moreover, says the institution will publish a report saying that 70% of Spanish banks is healthy.

The economy minister has also advanced to the June 11 will be released a first report of the International Monetary Fund concluded that 70% of Spanish banks is "perfectly" healthy and the remaining 30%, which is Bankia, would have "more difficult" to overcome the stress test posed by this organism.

However, De Guindos has stated that the IMF's stress test provides a hypothetical decline in GDP of 4% this year and 2% for next year, prospects "unreal," said.

"The report goes on to say that 70% of Spanish banks can overcome the situation without capital," he underlined Guindos, in an attempt to instill confidence in the situation of Spanish banks.

Anyone who thinks Spain's banks other than Bankia are "perfectly healthy" is a liar or insane.

Hyperbolic Selloff Coming?

The Telegraph reports Spain faces 'total emergency' as fear grips markets

Markets are on tenterhooks as Spanish yields test levels that forced the European Central Bank to respond last November with its €1 trillion liquidity blitz. “Nobody is short Spanish debt right now because they are expecting ECB intervention,” said Andrew Roberts, credit chief at RBS. “If it doesn’t come -- if we take out 6.8pc -- we’re going to see a hyberbolic sell-off,” he said.

Brussels floated the idea on Wednesday for a eurozone “bank union” and use of the European Stability Mechanism -- which has not yet been ratified by most states -- to rescue banks and sever the dangerous nexus between crippled lenders and crippled states.

The proposals were shot down instantly by Berlin. Such plans amount to debt-mutualization, a form of back-door eurobonds. German opposition is “well known”, said the Kanzleramt.

LSE Professor Paul De Grauwe accused the ECB of cherry-picking treaty clauses to justify inaction and failing to carry out its crucial mandate of financial stability. “They should buy Spanish and Italian bonds to cap yields at 300 basis points over Bunds, and let the lawyers argue about it for the next ten years,” he said.

Eurozone data released on Wednesday show that private credit and all key measures of the money supply contracted in April, suggesting that ECB’s €1 trillion liquidity blitz over the winter has failed to gain traction.

Guy Mandy, credit strategist at Nomura, said the ECB has lost sight of the big picture and risks losing the euro altogether if if fails to restore basic confidence. “They need to weigh up events on a grander scale, stop worrying about moral hazard, and do the job of a central bank,” he said.

Academic Wonderland and a Lesson on Moral Hazzard

LSE professor Paul De Grauwe is a complete fool trapped in academic wonderland.

If the market thinks the yield of Spanish and Italian debt should be greater than a 300 basis point spread to German bunds, then the ECB would soon be the proud owner of 100% of Spanish and Italian debt.

It is rather amazing that a professor cannot figure out that simple truism.

Economic fools like De Grauwe are part of the problem. They brainwash students into believing total and complete nonsense.

As for "doing the job of a central bank and stop worrying about moral hazard" I can say the same thing about Guy Mandy.

Neither cares one iota that the German constitution does not allow what they propose. Neither bothered to figure out this mess has gotten bigger every step of the way because central banks ignored moral hazard.

Indeed, central banks are by their very existence the epitome of moral hazard.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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