Wednesday, June 13, 2012

Spain Bailout To Be Funded By Bankrupt Spain & Italy

Questions continue to emerge regarding how the most recent Spanish bank bailout of $125 billion will be funded. The current structure of the EFSF fund (the large bailout fund pooled from all Eurozone members) has Spain contributing 12.75% and Italy contributing 19.18%.

Spain contributing to its own bailout should need no further discussion. Italy's contribution is almost as ridiculous. Italy, just like Spain, Greece, Portugal, and Ireland are currently insolvent and can only continue to function through additional bond sales and/or bailouts. It currently costs Italy somewhere between 4 - 7% to borrow money in the bond market. The current loans to Spain of $125 billion are set at 3%.

Italy must sell bonds (the country has no money) at 6% and then re-lend that money to Spain at 3%. Again, as with Spain borrowing money to contribute to its own bailout fund, the stupidity involved in the Italian loan could be understood by a 3rd grader.

Italy has a government debt to GDP ratio of 125%, well worse than Spain's current 70% mark. However, Italy's banking system is not quite as bad as Spain's at the moment. In the world we live in today, governments and banks within that country are now counted as one entity because it is immediately assumed that no politician in the world will have the courage to let a bank fail (the same banks that paid for their election through campaign contributions).

Every day, all the PIIGS countries continue to deteriorate under the surface. It will not be long before Greece once again runs out of cash, and if Italian rates continue to rise at the current pace Italy will need a bailout in a matter of weeks. The world will soon see what happens when the political solution to a debt problem is additional debt. Unfortunately, it appears that every PIIGS country may face the reckoning day at the same moment.

Nigel Farage has much more on this topic in the video below, as he provides another lesson on common sense to the politicians of Europe.

 

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