When Ireland’s banks went bankrupt ran out of capital, the Irish Government needed a bailout and funded them directly as sovereign debt. Spain after pumping €4billion into Bankia initially, now looks to have found a new way to play the game or as ~The Slog has called it appropriately “cash for shit exchange”. The weakness in the euro is while the ECB won’t fund sovereigns directly, it will take any old shit as collateral from the banks and Rajoy knows it. BRILLIANT 😉

In an amazingly cunning stunt, the Spanish Government plans to pay for Bankia’s nationalisation with its own debt…and then get Mario Draghi’s European Central Bank (ECB) to exchange this junk for cash.

As a chap who’s fond of bailing out sovereign states with worthless paper, Mario Draghi may well find himself trumped this week by Mariano Rajoy of Spain, who (prodded by the crafty Bankia president, Jose Ignacio Goirigolzarri)  has cooked up an entirely legal cash-for-sh*t exchange whereby Madrid injects €19bn of unrepayable Iberian debt into Bankia, who then send it up to Frankfurt in exchange for real spendable euros printed by Mario’s dwarves provided under the eurozone liquidity scheme.

“This could catch on in a big way,” giggled The Slog’s baleful Fifth Columnist in Brussels, “Imagine giving someone like Venizelos this idea….he’d empty the ECB in a week”.

The Slog’s contact has confirmed that Spain does not intend to fund Bankia in this manner but has bolder plans.

Joking apart, my normal contact in Madrid is already in the office this morning, and acutely aware of how this new contagion could spread very rapidly.

“I know for a fact that the Government here is considering a similar plan for some larger Cajas if this one goes through,” he confirmed, “So Draghi cannot afford to set a precedent. Rajoy is basically using the eurozone’s own rules to force the ECB into direct help for banking insitutions…but without the need for Sovereign bailouts. For now at least.”

The theory is that this will be less spooky for the bond markets buying (or rather not buying) Spanish debt. It also gives the Madrid government a way of reducing its outgoings massively without needing the markets.

The problem of course is that this is a national-centric short-term ruse that can only lead to a medium term ‘run’ on the ECB’s liquidity resources. And it leaves Draghi with two equally unpalateable alternative courses of action: to renege on his own promises and say no to the exchange; or to start printing a great deal of money.

The ECB are well used to bending the rules, are Spain about to out-fox them?

Source: The Slog