Spanish Banks Will Demand Blood to Keep Carry Trade Going

February 18, 2010 (LPAC)-The major Spanish banks are up to their eyeballs in the carry trade, the Financial Times blog site discovered on Wednesday. But no mention of London-controlled Banco Santander, no mention of Rothschild, no mention of Brazil as the source of loot — and certainly no mention of the man who blew the whistle on the whole Ponzi scheme, Lyndon LaRouche.

Alphaville blogger Tracy Alloway instead quotes a Union Bank of Switzerland (UBS) memo that says "We believe 2009 was the high point for the carry trade," given that the ECB issued 614 billion euros (about $840 billion) in cheapo loans to banks at 1% interest rates that year, which banks then used to make speculative killings in places like Brazil, investing in government treasury bills which gave them a real rate of return of 37%—when you take into account the revaluation of the Brazilian currency (the real) over the course of the year.

But UBS sees trouble on the horizon, because rising borrowing costs for the banks "may cause them to increase their interest rate risk in order to support near-term earnings. This is what we believe is most prevalent in Spain." In other words, 37% per year isn't going to be enough to keep the next round of the Ponzi game going for the Spanish banks. Like Dracula, they need more blood.

The FT cites three factors leading to rising borrowing costs for the unnamed Banco Santander and others this year: 1) the ECB's one-year bail-out loans to the banks are coming due, and the ECB may charge more than 1% to roll them over; 2) all Spanish mortgages carry fixed-spread mortgages, indexed to the Euribor interest rate with a 12 month lag, and those are still dropping — meaning the banks aren't making enough loot on their totally bankrupt mortgage portfolio; and 3) "the sovereign situation could add 100 basis points to the cost of new funding for Spain's banks — more if the economic situation continues to deteriorate," Morgan Stanley reported in a note cited by the FT.

That last point simply means that Spain as a whole is blowing out, and that doesn't bode well for Santander and other banks domiciled in the country. In fact, Morgan Stanley on Tuesday night lowered its recommendation on Santander and BBVA stock (from overweight, to market value), arguing that the rise in sovereign risk premiums on Spanish government bonds can add 100 basis points to the cost of new financing for Spanish banks. Lo and behold, the Spanish government yesterday "succeeded" in placing 5 billion euros of new 15-year bonds, but only by increasing the yield offered by 27 basis points over their own January offering.