Spanish Banks to Get 100 Bln Euros

Good day. Another beautiful weekend here in the home of the 11-time World Champion Cardinals. Weatherwise, that is, those aforementioned Cardinals had a rough go of it this past weekend. We continued our streak of never having seen a winner when it’s EverBank night at the ballpark, last Friday night. But I DID get to see our little Christine! She’s been gone for almost nine weeks now.

The big news from the weekend was that eurozone authorities agreed to support Spain’s request for financial assistance, so they can recapitalize their troubled banks. A loan estimated to be around 100 billion euros would be provided either through the EFSF (remember this European Financial Stability Facility that they all argued about the size to fund the facility?) or the ESM (European Stability Mechanism). The size of the loan will be determined after an audit of the banks that is to be completed by June 21.

On a side bar, these auditors in Spain must be whirling dervishes to get all that finished in 10 days. But that’s their challenge.

The problem with all of this is that it doesn’t really address the overall problems of the peripheral countries of the eurozone. But stabilization is important and a HUGE win for the Spaniards, in that they will not have to accept the financial constraints of austerity like Greece.

Spain is on top of all this, their economic minister is good and what I think will happen is that the audits will reveal that the troubled banks need less than 100 billion euros. But another bailout? I’m growing comfortably numb over all these bailouts, folks. Just think, it all started here.

I think that the reason Spain was given a reprieve from the financial constraints that were placed on, say, Greece, is that Spain has been on top of this from the beginning. They have not attempted to get into a game of chicken with the Germans, as the Greeks did.

So the euro has gained a bit overnight and through the morning, but the gains are tempered, because everyone know that things in the eurozone are beginning to grind to a halt. Economywise, that is. All the austerity measures are really a drag on the economy of the eurozone, but then who among us didn’t think that to be the future for the eurozone economy, with the austerity measures in place? I doubt anyone.

Speaking of austerity, with all the fans of the “beautiful game” in the office, we had one of our four TVs turned to the first game of the “euro” tournament: Poland vs. Greece. In the first half, a Greek player was sent off after receiving a red card. Greece then had to play the rest of the game one man down. Someone then said, “Greece playing one man down is like soccer austerity” for the Greeks! Now that was funny!

So the risk assets should have a good day in reaction to the eurozone/Spain announcement this past weekend. And as I look at the currency screens, the only nondollar currencies not reacting favorably are Japanese yen (JPY) and gold. Treasuries are weaker — thus, taken with the weaker yen and gold, this is a very good indicator that “risk on” is the soup du jour today.

Last week, the markets were disappointed not only by Big Ben and the Fed heads, but the Fed and the Bank of England (BOE) left the markets holding the stimulus bag last week. But we did see Australia and China cut rates.

I talked a lot of China’s rate cut last Friday. For those of you who missed that discussion, you can find it in the archives of the Pfennig’s website,, where you’ll also see a glamour shot of me! Trust me, I don’t look that nice most of the time! HA!

But the point I was attempting to get to here is that one thing I didn’t mention last week is that China cutting rates illustrated how the emerging markets (look at Brazil!) have the room to ease in an attempt to give their respective economies relief, and the countries like the U.S. and England — or even now, the eurozone — don’t have the room to ease without putting their printing presses to work overtime on whatever name you want to give to bond buying.

Saturday night, I attended a great outdoor event downtown that had EverBankers and some customers. I got to talk to a customer that received the “Chuck on the patio” version of everything. One of the points I made was that the Fed had bought 61% of the Treasury auctions last year, to move into the No. 1 spot of holders of our debt. I truly believe that the Fed wants to move that percentage higher, or, better said, that the percentage will rise, because the Fed wants to keep rates low… But the day that the Fed owns 100% of our debt, is the day the dollar dies. You see, foreign banks won’t need to own dollars any longer, for they will not be needed, but Treasuries. And by then China will have signed currency swap agreements with most countries, thus relieving them of dollars that are used in the terms of transactions.

Did you see Brazil’s president dumping on the Fed this past weekend? Dilma Rousseff faulted the Fed for pumping too much money into the world’s largest economy. She had already claimed that the “rich nations” had unleashed a monetary tsunami. You see she’s really ticked about Brazil becoming the third-largest holder of Treasuries. But I don’t get her problem here. I’ve told you for over a year now that she was determined to get the real weaker, and she can do that by buying Treasuries, thus buying dollars, and selling reais. So what? Is she having second thoughts of owning all these Treasuries?

The Australian dollar (AUD) is sniffing around at reaching parity again this morning. Recall that last week we were here and the trapdoor sprung on the A$ when the markets were disappointed by the Fed and BOE. So let’s see: Data from China over the weekend showed some stabilization, and lower inflation, and the Greek election doesn’t take place until next week, so this could be the week that the A$ pushes and gets back to parity. But then I could be wrong, for only the Shadow knows what’s around the next corner for the currencies.

Speaking of Chinese data, China’s exports rose at more than double the pace forecast by the “experts.” Overseas shipments climbed 15.3% from a year ago, thus giving hope that China’s economy, while moderating, remains strong. Chinese retail sales increased in May, but were behind forecasts, yet there was the holiday week that probably hurt the numbers in there. And industrial production gained less than 10% (9.6%) from a year ago. But 9.6% is still pretty darn good, folks… moderating.

The French held elections this past weekend, and there was talk that these elections were more important than the Greek elections next week. From what I read, voter turnout was not very good and new President Hollande’s Socialist party appears to have won or secured a majority of the available seats, which might mean that Hollande doesn’t need to form alliances with other parties. And then the French will have their Socialist government. I hope that works out for them, but you get what you pay for, right?

I read this story in the Financial Times over the weekend: “The 19 largest U.S. banks are at least $50 billion short of meeting new capital requirements under the Basel III accords.” But they have until 2019 to meet the requirements, so it’s not like they need to scramble now.. I use this story to illustrate what I’ve been saying for a some time now, that we have the same problems as the eurozone, only bigger. But the markets only want to punish the euro right now, not the dollar.

I think that things here are very bad. But then I don’t wear rose-colored glasses like most people in the government do. And that includes the Fed, which isn’t part of the government. You know, I’ve read a lot of stuff over the years about how the U.S. economy could be brought to its knees, the dollar could lose all its value (not that it has much left) and a collapse of the financial system would then be used by whomever is in charge to change the political environment. Now, I’m not saying that this is going to happen, folks. I’m just telling you about the stuff that I read on this.

But here’s where I am on this stuff. If you don’t care, then skip ahead. As I’ve been saying about how the euro is punished for its debt transgressions but the U.S. dollar isn’t, this is going to change, because I see the eurozone working through their solvency issues. Then how are the media going to get everyone to focus on the eurozone instead of the U.S.? When that happens, the dollar will get punished like it did last year, when the debt ceiling debacle took place. Oh, what’s that you say, Chuck? The debt ceiling will have to be addressed again at the end of summer?

And even if nothing like anything I’ve talked about ever happens — and that would be GREAT — wouldn’t it behoove investors to protect their wealth that’s denominated in dollars? Just a thought.

And since I’ve been so depressing this morning with this stuff, I thought I would tell you once again that Agora’s Byron King continues to write about how the natural gas and oil discoveries here in the U.S. are going to make the U.S. energy sector No.1 in the world, and remove our dependence on foreign oil. Now, isn’t that exciting? I guess as long as the U.S. government and EPA don’t stick their hands in there and act like they know what they’re doing! So when the U.S. economy is circling the bowl, our gas prices will be lower! Well, maybe.

Then There Was This, from The Fiscal Times:

“In another dire impact assessment of the more than $1 trillion of automatic cuts in defense and domestic programs, the Bipartisan Policy Center warned on Thursday that the deep savings would greatly add to the country’s economic woes by slowing growth and wiping out more than a million jobs — without putting a dent in the federal debt.

“The sequestration cuts next year alone would amount to a 15% reduction in almost every defense program and project — much deeper savings than previous estimates — and force layoffs by defense contractors and their suppliers. Domestic programs could come in for similar reductions, although Medicare, Medicaid and Social Security — the main drivers of spending — would be off-limits to cuts.

“The net effect of these mostly arbitrary and abrupt spending cuts would be to drive down the gross domestic product by roughly a half a percentage point and put more than 1 million Americans out of work over the next two years, according to the study. Federal workers ranging from FBI and Border Patrol agents to civilian Defense Department employees to government physicians and teachers would face unemployment in early January unless Congress decides to cancel or revise the sequestration.”

Remember last year when I told you it would not be good that the lawmakers that were put in charge of making cuts and then didn’t, and the automatic cuts would be set off? Well, here we go. Now, all the “U.S. economic recovery is on the way” campers can put that in their pipes and smoke it. This is not going to be good!

To recap: Eurozone officials approved Spain’s request for financial aid for its troubled banks to the tune of 100 billion euros. The risk assets are moving stronger this morning on that new, and the news from China that their trade numbers had blown the expectations for decline out of the water! Brazil is ticked about moving ahead of Japan as the third-largest holder of Treasuries. Hey, Dilma… just say NO!

About Chuck Butler 105 Articles

Affiliation: EverBank

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

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