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How Much More Pain In Spain?

 April 18, 2012 10:18 AM


(By Cam Hui) The headline read: Ray Dalio's Bridgewater Says Spain Is Worse Off Than It Was Before The LTRO. Simone Foxman reports Ray Dalio of Bridgewater Associates believes that:
The fund argues in a recent note to investors that Spain is even worse off than it was before the ECB announced its two LTROs in December.

Dalio argues that the tenuous circle of fragile Spanish banks providing funding for the Spanish government which in turn supports the troubled banks is swiftly eroding, if not vanished already:
I have argued in the past that the European Elites have a Grand Plan, consisting of austerity and structural reform, combined with a compliant ECB as long as the first two initiatives are followed. Foxman reports that Bridgewater believes that any policy response will be complicated:

  • Dalio and his team believe that since the burden is being shifted to the public sector and domestic banks, we will be less likely to see the kind of private sector debt restructuring used in Greece.
  • They also predict that EU leaders could soon tire of the slow progress of Spanish bank mergers meant to clean up Cajas' balance sheets.
  • Dalio believes that EU policymakers remain committed to ill-fated attempt to "save almost everyone" by using under-capitalized bailout funds like the European Financial Stability Facility.
  • But they will also have to act in a much more of a hurry than they previously believed, given Spain's predicament. This will show the inadequacy of currently budgeted resources to deal with the problem, and could pain EU leaders' abilities to deal with crisis problems in a negative light.
  • Ultimately, Dalio thinks, trying to save Europe without restructurings will prove to costly, and EU leaders will have to accept that more restructurings will be necessary.
In other words, a policy response will have to be quick. It will be complicated, but not impossible. Megan Greene of RGE says that a Spanish bailout is pretty much inevitable:
If Spain is unable to regain market confidence, will it be pushed into a bailout programme? Not immediately, but this does seem inevitable. The good news as far as Spain is concerned is that the country has already pre-funded half of its debt rollovers for 2012. Even if Spain faces unsustainable borrowing costs, it will not actually run out of cash this year.


Furthermore, the ECB will not stand idly by while Spain is forced into a bailout programme.

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