Tags: Markets | bankruptcy | us | spain

Markets Focused on the Wrong Bankruptcy

Wednesday, 25 Jul 2012 08:19 AM

By Ashish Advani

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The markets are once again on a slide. This time it is a fear of the bankruptcy of Spain.

Sigh. We have not yet resolved the crisis in Greece and now we fear that Spain will need a large bailout, as well. Spain has made headlines before during this crisis, but never to this extent. The total sum involved? $350 billion. That sum will come into play only if the full fear of a sovereign bailout becomes reality. It is not clear today if that will actually happen or not.

So what is a sovereign bailout? So glad you asked.

A few weeks ago, the European Central Bank announced it would lend $100 billion to Spain so that it could support its banks and stop any collapses there. How would Spain do that? It would use the $100 billion to buy junk assets from the banks and give them the money. Now the Spanish government owns junk assets.

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The Spanish government supports 18 regions (read that as the equivalent of U.S. states). Through the global slowdown and during the European crisis, businesses in Spain have also slowed, and thus tax revenues are down, unemployment is up and the regions are running short of cash. When the 18 regions it supports wants money to survive, the Spanish government is short of funds and nearly bankrupt. The markets globally now fear that the ECB will have to bail out the Spanish government rather than only the banks in Spain.

The amount is $350 billion. While I do not take the crisis or the amount lightly, let’s put that in perspective, shall we?

Between Friday and Tuesday, the U.S. markets alone have lost about 2 percent each on the S&P, Dow and Nasdaq. The sum total of that drop by itself is about $1 trillion. This is just in the United States. If you add the worldwide stock market drops, we have sums exceeding $3 trillion, which is nearly 10 times the possible bailout amount that Spain might need.

I am not only shocked at the irresponsible behavior of the traders and their lack of understanding of the gravity of the situation, but I am appalled at the fact that the traders are all focused on the wrong set of bankruptcies.

Pop Quiz – What do Stockton, San Bernardino, Vallejo, Compton and Mammoth Lakes have in common, besides all being in California?

Give yourself a gold star if you answered – They have all declared bankruptcy this year. Yes folks, these are all cities in the United States that have already declared bankruptcy. The list does not end in California. There is Harrisburg, Pa., Central Falls, R.I. and Jefferson County in Alabama. I am sure I have missed a few more honorable names in this distinguished list.

The federal government will have to start bailing all of them out one by one unless we want to see third world-like conditions here and anarchy break out, as these municipalities do not have the money to pay law enforcement, teachers and city workers.

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I do not need to tell you about the junk that the Federal Reserve has bought from banks in the meltdown days, as well as printing money to buy its own debt, which is a bogus transaction.

Once the tide runs out, we will see the extent of the bankruptcy of the U.S. federal government and its lack of ability to save its own citizens.

If you think that the 2 percent decline in stock markets is a big reaction to $350 billion in Spanish sovereign default, I shudder to imagine how deep the bloodbath will be when the traders focus on the United States.

My funds are headed to South Korea, where there are predictions for 3.5 percent growth for the second half of 2012 and no major deficits to worry about. Real money for real business.


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