Made you look
Although the headline is obviously too bizarre to be true, I bet that a lot of people see it, and wonder for at least a moment what Spain is up to now. That moment of doubt, that thought that a country could be guaranteeing its own debt is a key to this year.
Much has been made about how Europe “finally gets it” or is going to “muddle through” or that we have seen the worst of the problem. I don’t think that is true at all. Europe is attempting to contain the problem. LTRO was launched to help the banks and possibly help sovereigns. National Central banks are trying to provide money. EFSF did a new bond issue so it can throw some money at the problem. Countries are attempting to implement austerity programs, and tax collection programs, and re-agreeing to a treaty they all agreed to originally but failed to live up to. These may be enough to contain the crisis. With some economic growth and a bit of luck, maybe the worst is over. I highly doubt that. Nothing has been fixed. The banks are a mess. The countries are a mess. We will likely see a renewed sell-off (we may already be at the start of that move wider).
This renewed sell-off (if and when we get it) will be far worse than before. Not only has Europe exhausted many options but that doubt about exactly what countries have done is going to come to the forefront. Last year, it was really only a few people at the fringe that were jumping up and down and trying to point out all the contingent liabilities sovereigns have committed to. Those guarantees and commitments were acknowledged by the market, but largely ignored. That is going to be harder. It is becoming too prevalent.
The Italian banks issuing bonds to themselves to get a government guarantee to that they can use them to get money from the ECB is raising a lot of eyebrows. It is focusing investors on the fact that Irish, Portuguese, and Greek banks have been playing similar games to raise money for a year or longer.
Greece, on the verge of default, had a €1 billion to spend on preferred shares of National Bank of Greece.
Spain provided a “verbal” guarantee for a loan that Valencia owed (the guarantee is probably worth the paper it is written on).
France, Germany and others have their own debt, commitments to EIB, commitments to EFSF, some obligations as part of the TROIKA for the original bailouts, commitments to the IMF, and who knows what else. Well in France’s case, what else includes its guarantees of Dexia, but could include much more.
All these commitments have largely been ignored, but as the market has had time to dig deeper, concerns about these commitments is rising to the surface. Just think back 3 months, would you have really opened an e-mail with the title “Spain Guarantees Spanish Bonds” and if you did, it would be to see what idiot comment a “doomer” is making. The fact that you were now at least curious as to what Spain may have done is a really important difference and will play a major role in the next round of weakness (again, assuming we get it). Some of these connections are new (the Italian “ponzi bonds”). Some have been growing (Greek, Irish, and Portuguese banks financing themselves at the ECB with government guaranteed debt). Some have been out there for a long time (EIB). It is always hard to say when the market will go from being indifferent, to curious, to concerned, but I think all these guarantees and contingent liabilities are getting close to becoming a concern and that will put pressure on the entire system. (A lot of people knew a lot of what Enron was up to, and seemed fine with it, until one day, or week, they weren’t).
Hungary deserves to be watched closely. They seem to be doing what they want, and not want the IMF wants them to do. The bond market doesn’t like it, problems there will impact Austrian banks significantly. Just because it doesn’t use the Euro, doesn’t mean it won’t impact the Eurozone. I would guess that Greece is watching the events unfold in Hungary very closely (at least the non technocrat Greeks).
So be very careful “buying the dip” because there is a real risk that any slide accelerates and cannot be contained by a few more worthless guarantees and promises of summit meetings because too many people will become too concerned that every financial institution and sovereign is completely cross-contaminated.