The Pain in Spain Falls Mainly on the Sane

My favorite movie is My Fair Lady. The scene where Eliza Doolittle has learned to talk without her cockney accent is one of my favorite scenes. The sheer exuberance of the scene is a lot of fun to watch. I have a feeling that the current situation in Spain is not going to be fun to watch. 

Already the smart money has left Greek banks, and many Greek citizens have taken their savings out of the bank for the proverbial mattress. 

The Financial Times reports:

Greece’s four largest banks received a €18bn transfer on Monday as the first instalment of a recapitalisation plan agreed as part of the country’s second bailout by the EU and the International Monetary Fund.

(If you do want to see the article without registration google "financial times" "Greek Banks to receive" Note that this is from Mish Shedlock.) 

Of course when the Greek banks fail this money will never be repaid. Maybe not even in drachmas, the traditional name of the pre-Euro Greek currency. How much will a Greek exit cost? This is Bloomberg's guess:

The cost of Greece exiting the euro would be unmanageable and probably exceed the 1 trillion euros ($1.25 trillion) previously estimated by the Institute of International Finance, the group’s managing director said.

Of course this money does not exist so it will have to be printed. 

Although the "powers that be" in Spain deny it, Spain is on the edge of just such a bank run—the next domino to fall. 

ABC News tells us: 

Bankia is considered key to the country's financial system, and a failure would contaminate the entire banking sector.

The plight of Bankia - which holds some 10 per cent of the nation's bank deposits - has added to the concerns over the massive debt crisis gripping Spain and the rest of the eurozone.

Bankia president Jose Ignacio Goirigolzarri has sought to reassure investors and the public about the future of the struggling bank at a press conference called the day after it announced huge losses, and asked for a government rescue.

How much will it cost if Spain leaves the Euro? This is so frightening there is no official estimate that I am aware of. 

In addition to Spain's banks, Spain's provinces are in trouble too. 

Here is Mish Shedlock's view:

The crisis in Spain is rapidly coming to a head. This crisis has nothing to do with Greek "contagion" as is widely believed. Spain dug this hole by itself. Spain's immediate unsolvable problems are a bankrupt banking system coupled with bankrupt regions that have no way to pay bills. Spain's regional governments need to roll €35.7 billion and there is current deficit of €15 billion.

The president of Spain's Catalonia Region said it faces refinancing needs of €13 billion and is "running out of options refinance its debt".

Catalonia accounts for about one fifth of the Spanish economy.

Moreover, Spain's Valencia region set off alarm bells on a six-month €19 billion bond issue because it may be forced to pay a 7% return, more than two points above what Greece is paying for their junk bonds.

As I mentioned last week, in the short term, this is good for the dollar. 

But in the long term, 

What can't go on, won't go on.

Update on Sunday, June 10, 2012 at 7:10PM by [Positive Dennis]

There is a downside to posting articles in advance. This weekend a bailout of Spanish banks was announced. It was 50 75 125 billion. The amount kept growing as the weekend progressed. Maybe the "powers that be" are right and kicking the can down the road will work one last time.