Test Balloon in Spain: Forcing Citizens and Businesses to Buy Government Bonds

(Financial Times) — Spain has taken a 45 per cent stake in Bankia, the country’s third-largest bank by assets, as worries over the financial system sent equity and bond markets falling on Wednesday.  The Bank of Spain said Bankia and BFA, its parent company, had informed it that the conversion of €4.47bn of state aid in the bank into ordinary shares was “the most advisable option for strengthening the [bank's] financial soundness”.  As a result of the conversion the Frob, Spain’s bank bailout fund, will hold the 45 per cent stake in Bankia.
Spain’s ministry of economy said the move was “a necessary first step to ensure its solvency, the tranquility of depositors and dispel doubts about the entity’s capital needs”.

Transcript from the Video:

Martin Feldstein of Harvard University, advisor to Pres. Obama, says that “Spanish citizens and businesses should buy Spain’s Treasury Bonds to shore up confidence in the system.  If they [Spanish Govt] need to do so, they will actually REQUIRE Spanish households and businesses to buy these bonds.  In effect, they will use the tax system to assess the amount that households and businesses need to buy.  It’s not a tax, because they will be given an exchange, a government bond… And the fact that [this mandatory buying provision] is potentially there should give confidence to foreign buyers, as well as domestic buyers [of Spanish Treasury Bonds] to actually buy on a voluntary basis.  In a sense, you could say that this is a tax, but it’s not an ordinary tax, where you send you money to the government and they say, ‘thank you very much’, here, you send the government your money and you get something in exchange, a bond, a promise of the government to pay it back with interest.”

CRITICAL POINT – this guy advises Obama…so the forced buying of bonds in Spain may well be a test balloon for a similar “tax” being imposed here in the US.

Taken together, these two data points [the 45% nationalization of Bankia, and the prospect of forced bond purchases] indicate a very desperate and urgent financial situation in Spain.  I would say that the countdown to a National Bankruptcy in Spain has formally begun, as the parallels with events in Greece some two years ago is quite linear.

In all probability, the failure of Spain as a Sovereign Financial entity will be the proximal cause of death for the Euro as a currency.  The ECB and EFSF do not have the backing to absorb the Spanish debt, France will quite likely refuse to provide additional EFSF funds, and there is far less confidence [willingness to invest] in European sovereign bonds and/or European banks now than there was two years ago.

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