“If Germany takes that first step, it must be prepared to keep marching”

“Spanish government leaders are now beginning to admit they must have help, as it appears they will soon be frozen out of the bond market, if that has not happened already. As I have written, it will take a massive commitment of European (read German) money to save Spain, and it’s not a one-time commitment. It is not just 100 billion euros to re-fund Spain’s banks. If Spain gets frozen out of the market, adding another €100 billion in debt will not make things better, when there is a nearly 10% fiscal deficit, unemployment as bad as Greece’s, and an economy that is in freefall.”

The above remarks are from John Mauldin’s Weekly E-Letter, entitled “A Dysfunctional Nation.”  There, the long-time market pundit and investor discussed his latest thoughts in an extensive piece on the European sovereign debt crisis and the ensuing political turmoil.

According to Mauldin, “Europe is going to have to buy all Spanish debt for years. And not just new debt but all the old debt that is coming due and must be refinanced. We are talking hundreds of billions of euros. And if there is a bank run on the order of Greece’s? The number just keeps getting bigger. To think it will be anything like the €46 billion being talked about by the IMF today is to simply ignore economic reality.”

He went on to say that “That money will have to come from somewhere. Either the ECB will have to monetize it directly (possible but not likely) or a pan-European entity like the ESM will have to be allowed to become a bank and then apply to the ECB for loans and a capital infusion in order to then bail out Spanish (and other) banks.”

Additional highlights from Mauldin’s commentary included:

It is obvious, at least to your humble analyst, that if the eurozone is to survive several things must happen. First, there must be something created on the order of a European FDIC. Banking guarantees and regulation must become a European responsibility, not a country responsibility. How would it have worked if the rest of the US had decided that New York should bail out its own banks, when they had their crisis in 2008?

Second, if the ESM is allowed to become a bank, then what will those guarantees look like? Because the original agreement of member countries to back a specific and limited amount of debt will now be increased ten-fold. And that will mean something in the neighborhood of €4-5 trillion.

How could they need that much? The answer is, because it will not be just Spain. Can Italy be far behind, given the unfolding European recession? And the French banks? France itself, given the new policy direction of its government and its own massive unfunded liabilities?

Assume it is just €4 trillion, spread over a few years. Germany will be responsible for at least 25% of that amount, or about 40% of their GDP. And that assumes that Spain, Greece, Ireland, et al. will be good for their portions.

Will Germany want to take on such a massive new debt? The periphery countries already owe the German Bundesbank over €1 trillion. German debt-to-GDP is already at 80%. German credit default swaps are rising in cost.

If Germany takes that first step, it must be prepared to keep marching, because to stop at any point will mean even more pain, since they will still be responsible for their share of any debt created after that first step. As they say at the poker table, “In for a dime, in for a dollar.”

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