Hope persists that Germany would not only bail out Spain and the rest of the Eurozone but would also tolerate the Fed-ization of the European Central Bank. Even Treasury Secretary Tim Geithner was hounding German Finance Minister Wolfgang Schäuble, who was on vacation like the rest of Europe. And yet, Deutsche Bank, Germany’s de-facto vice-ministry of finance whose CEO serves as éminence grise behind elected officials and bureaucrats alike, well, that venerable institution at the core of Germany Inc. appears to be closing the book on Spain.
And it’s Spain everyone is worried about. Not Greece. Which appears to have become a fait accompli. Even with Geithner. After his meetings with Schäuble and ECB President Mario Draghi, Geithner called Spanish Economy Minister Luis de Guindos. According to “sources of the Spanish government,” they tossed around solutions to stabilize the Eurozone and resolve the debt crisis that is ravaging Spain and Italy. Not a word about Greece. It has fallen off the agenda.
Spain is suffering from stratospheric unemployment, banks on life support, a moribund economy, and bankrupt autonomous regions. One of them, Catalonia, announced it would not be able to pay hospitals, schools, social organizations, child care centers, etc., public and private, for contracts they have with the government. The noose tightens.
So a week ago, de Guindos met with “el todopoderoso Wolfgang Schaüble,” the almighty Schäuble, as El País calls him (including the umlaut on the wrong vowel), to work something out. It’s urgent. Spain will run out of money in October unless it can raise enough to cover the bonds that are coming due, pay for its ongoing deficit, and bail out its regions. But it doesn’t want to pay the elevated risk premium the market demands for its bonds, and it doesn’t want to ask for a bailout because it doesn’t want the Troika—the austerity jocks from the ECB, the EU, and the IMF—breathing down its neck and run the show, as they’ve done with such great success in Greece. Spain wants to keep its sovereignty and dignity. If nothing can be worked out, Spain would, according to government sources, default. That word made it into print. With immediate effect.
So the best solution on the Spanish wish list would be for the ECB or the bailout funds (the EFSF and later the ESM) to buy Spanish bonds, either in the secondary markets to force yields down, or directly, but without any bailout conditions—precisely what the German Bundesbank and the Ministry of Finance have vowed to oppose: bailouts would come with conditions, namely budget cuts and structural reforms.
Alas, as long as “el todopoderoso” Schäuble demands conditions, Spain won’t request a bailout. Not until the very last minute. A game of chicken, with default as consequence. Geithner was probably telling de Guindos to back off and request a formal bailout and get it over with as soon as possible to avoid a crisis whose effluent might drift across the Atlantic and seep into the shaky US economy. President Obama’s reelection would be at stake.
But then Deutsche Bank released its earnings. They weren’t pretty; 1,900 jobs would be cut. And ominously, the bank, which walks in lockstep with the German Ministry of Finance, had dumped 37% of the Spanish sovereign debt still remaining on its books. By the end of June, it only held €873 million, down from €1.4 billion three months earlier. A process that is likely to continue—now that default and October had appeared in the same paragraph in Spanish papers. And so the bank is walking away from Spain, in synch with el todopoderoso Schäuble’s rejection of Spain’s wish list.
Deutsche Bank isn’t the only one. Capital flight continues to set new records in Spain. According to the Bank of Spain’s just released Balance of Payments, €41.3 billion left the country in May, bringing the first five months of the year to €163 billion. Eleven consecutive months of declines! For a total of €259 billion. 21.6% of GDP. And those are the people who know best.