This is when you know that the effort to save the Euro (FXE) from itself has entered the realm of the absurd.
As we all know, over the past weekend Spain asked the Eurozone finance ministers for €100 billion to stave off the possible collapse of its banking sector.
Setting aside for a moment the problems with Spain's banks - which are probably unfixable absent out and out default - let's take a peek into one of the more ridiculous aspects of the latest bank bailout.
€100 billion is a lot of money. We'll leave for another day the fact that it may not be enough to solve the actual problem. But €100 billion is still a whole lot of money.
So where will this money come from?
First, let's throw away the alphabet soup of bailout financing mechanisms currently inhabiting the continent's financial landscape. It doesn't matter whether it comes from the ESM, EFSF, IMF, ECB, LMNOP. Forget all that. We'll just call them the Alphabetacrats from here on in.
What does matter is that the money to be turned over to Spain for this bailout can only come from one place - the EU's member nations themselves. Now they in turn have two places to go for the money - taxpayer receipts or the capital markets.
Now, along comes Italy, one of the six core states of the European Union. In this bailout, it is estimated that Italy is on the hook for approximately 22% of the money to be forked over to ailing Spanish banks. That means that the Italian government will have to contribute €22 billion.
This is where it goes from silly to stupid.
Italy does not have this money. They run a modest budget deficit so they are going to have to borrow it from the capital markets so the Alphabetacrats can then "lend" it to Spain.
As of this morning, yields on 10 year Italian bonds were 6.13% (a 483 bp spread over 10 year German bonds).
Let's not forget that any interest rate above 7% is widely considered to be unsustainable in the current crises. In short, the bond market wont buy 7% 10 year notes because they don't believe they will be repaid. So clearly Italy itself is flirting with financial peril. This ain't news.
But in order to live up to their commitment to the Spanish bailout, they will have to borrow €22 billion. At today's 10 year bond yield that will obligate them to investors who buy the bonds approximately €1.348 billion in interest per year.
Now, here is the really stupid part. The Alphabetacrats are going to take this money from Italy and turn around and lend it to Spain at a rate of approximately 3%.
So to meet their obligations under the disclosed terms of the Spanish bailout, Italy has agreed - in advance - to receive €660 million for a loan which cost them €1.348 billion. That means a cash strapped country like Italy has agreed to lose/throw away/burn/donate roughly €688 million to its Iberian neighbor.
That's if their neighbor pays them back at all.
Meanwhile, all this has now been blessed and approved and commented upon by policy makers as a positive step to restore the marketplace's confidence in the banking system. I guess that €688 million in a crisis where trillions are being thrown around is pretty much pocket change.
But regardless of the amount involved - just how again does insolvent nations borrowing at 6% to lend to insolvent nations at 3% restore confidence?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.