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Tuesday, May 29, 2012

The Spanish Fly in the Ointment

~reposted from

Today was one of those kumbayah days when even lousy housing data, consumer confidence and Dallas Fed data couldn't depress equity prices.  The market spent all day reinforcing my faith in our forecast.  Ah, those were the hours...

As everyone knows, the euro zone whack-a-mole game has been focused on Spain lately.  So, the print-our-way-to-happiness bunch was understandably enthused when Spain announced they would truck $24 billion in Spanish sovereign debt over to failing Bankia -- Spain's second biggest bank -- which would then exchange said debt to the ECB for something worth the paper it's printed on.  Presto chango, ipso facto... the boo-boo's all better.

A perfect plan -- except for one small detail:  the ECB wants nothing to do with it.  According to the Financial Times, the ECB wants Spain to implement (stop me if you've heard this one) a serious austerity plan and start living within its means -- maybe even inject some real live capital.  Spain, on the other hand, insists the Portugese, Greek and Irish attempts at same have been "catastrophic" and refuses to go down that road.

Who will blink first?  Good question.  As we learned from Bear Stearns, Lehman, Greece, et al, the first stone doesn't matter so much.  It's the ripple effects (read: contagion) that can send yields soaring and freeze up credit markets.  The more countries that get away with it, the more will try.  And, all the posturing and all the lines in the sand won't make a bit of difference.

Stay tuned.

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