Spain Uses 90% Of Social Security Fund To Buy Its Own Debt

You know when your country is up shits creek when you hear stories of social security funds being used up to fund the country’s debt. In Spain’s case over 90% of its Social Security Reserve fund has been used to purchase worthless Spanish 10yr bonds. Not long left now 😉 

MADRID—Spain has been quietly tapping the country’s richest piggy bank, the Social Security Reserve Fund, as a buyer of last resort for Spanish government bonds, raising questions about the fund’s role as guarantor of future pension payouts.

Now the scarcely noticed borrowing spree, carried out amid a prolonged economic crisis, is about to end, because there is little left to take. At least 90% of the €65 billion ($85.7 billion) fund has been invested in increasingly risky Spanish debt, according to official figures, and the government has begun withdrawing cash for emergency payments.

Although the trend has drawn little public attention or controversy, it has become a matter of concern for the relatively few independent financial analysts who study the fund, which is used to guarantee future payments of pensions. They say the government will soon have one less recourse to finance itself as it faces another year of recession and painful austerity measures to close a big budget deficit.

That pressure, some analysts said, could force Prime Minister Mariano Rajoy’s government to seek a rescue this year from the European Union’s bailout fund, a politically risky course he seeks to avoid.

In addition, there are worries that Social Security reserves for paying future pensioners are running out much quicker than expected.

In November, the government withdrew €4 billion from the reserve fund to pay pensions, the second time in history it had withdrawn cash. The first time was in September, when it took €3 billion to cover unspecified treasury needs.

And what happens when Governments break the rules. They change them 😉

Together, the emergency withdrawals surpassed the legal annual limit, so the government temporarily raised the cap.

“We are very worried about this,” says Dolores San Martín, president of the largest association of pensioners in Asturias, a small region that has one of the highest percentages of retirees in Spain. “We just don’t know who’s going to pay for the pensions of those who are younger now.”

Spain aren’t the only country to tap into their pension reserves.

In the years before Europe sank into crisis in 2008, some countries, including Spain, Finland and France, accumulated rainy-day pension funds made up of the surplus left from social-security payroll deductions after pensions were paid out. The reserves were to be tapped in future years, when payroll deductions may fall short of payout obligations.

After the crisis began, some of those countries began using the pension reserves for other contingencies, such covering a drop in foreign demand for their government bonds. Since the collapse of Ireland’s property boom, for example, most of its pension fund has been used to buy shares of nationalized banks and real estate for which no foreign buyers could be found.

“Most of the [Spanish] fund is an accounting trick,” said Javier Díaz-Giménez, an economics professor in Spain’s IESE business school. “The government is lending money to another branch of government.”

Its a risky strategy as the Government is gambling that either the economy will pick up or domestic demand for Spanish debt will kick in. Both highly unlikely.

Spanish officials defend the heavy investment of the Social Security Reserve Fund in their government’s high-risk bonds. They say the practice is sustainable as long as Spain can continue borrowing in financial markets, and they predict the economy will start to recover late in 2013, easing the debt crisis.

But some analysts say Spain will have trouble finding buyers for the estimated €207 billion in debt it plans to issue in 2013, up from €186 billion in 2012, to cover central-government operations, debt maturities of 17 regional administrations, and overdue energy bills.

“With foreign investors staying away from the Spanish debt market, you’re going to need all the support you can get from domestic players,” said Rubén Segura-Cayuela, an economist with Bank of America-Merrill Lynch.

And domestic appetite for Spanish debt, he added, may not be enough.

Spain’s commercial banks already have increased their Spanish government-bond portfolio by a factor of six since the start of the crisis in 2008, and now own one-third of government bonds in circulation.

The percentage of Spanish government debt held by the Social Security Reserve Fund stood at 55% in 2008, according to official figures; by the end of 2011 it had risen to 90%. Analysts say the percentage has continued to rise, even as international agencies have lowered Spain’s credit ratings.

Spain’s continued use of those reserves to buy its own bonds appears to violate a rule set by government decree that mandates their investment only in securities “of high credit quality and a significant degree of liquidity.”

Last year Spain’s rating by Moody’s MCO +1.52%Investors’ Service and Standard & Poor’s Ratings Services fell to one notch above noninvestment grade, or junk status.

Tomás Burgos, head of the committee that runs the fund, said the ratings drops “are at the very least something to keep an eye on.” He added that the fund is solid enough to ensure future pension payments. It has more than doubled in value since 2005, the first year for which there is detailed data.

But with unemployment now above 25% of the workforce and fewer wage earners paying in, the Social Security System is about €3 billion in deficit, according to government estimates.

Source: Wall Street Journal Online

 

Spanish Minister Laughed At For Bullshitting

At this stage nobody fully believes that Spain doesn’t need a bailout. For various reasons (don’t want to damage Obama’s re-election chances being one) it hasn’t requested one but its a matter of time. So when the Spanish Minister of Economy Luis de Guindos turns up at the London School of Economics and tells them everything is honky dory and there is no chance of Spain requesting a bailout, he got the response you would expect. Laughter !!

You know that something is seriously wrong with your economy when you tell an audience of learned academics and students at an elite university that your country doesn’t need a bailout, and the room rings with the sound of laughter.

Getty Images Spanish Economy Minister Luis de Guindos speaks during a news conference.

That’s what happened when Spanish finance minister Luis de Guindostook to the stage at the London School of Economics (LSE) and became an unexpected comic figure on Thursday evening.

“Spain doesn’t need a bailout at all,” de Guindos said, straight faced and somber, as mirth spread throughout the audience — even de Guindos’ assistant interpreter couldn’t mask a smile.

Not to be perturbed by the disbelieving audience, whose giggles audibly spread throughout the room, de Guindos said that Madrid’s reform program was sufficient to stave off a full sovereign bailout and that the European Central Bank’s (ECB) bond-buying program would suffice to help Spain recover.

“What we have is a proposal from the European Central Bank to trigger intervention in the secondary market with certain conditions,” he said. “They have demanded that in order to intervene … they want certain conditionality.”

De Guindos, speaking in broken but clear English, said that Spain supported the ECB’s bond-buying scheme and that there was a distinction between Spain seeking a full bailout that would be overseen by the troika (the ECB, the European Commission and the International Monetary Fund) and accepting the enhanced credit line that the ECB is offering through bond buying, called the Outright Monetary Transactions.

De Guindos stated that as well as the ECB’s actions it was important that “the commitment of European institutions for the future of the euro” [EUR=X  1.3052    0.0035  (+0.27%)   ] was demonstrated in the form of a commitment to fiscal union.

 “Spain is going to actively support a banking union for the euro zone, a fiscal union for the euro zone,” he said. “In order for Spain to recover, it’s extremely important to dispel and to eliminate all doubts about the future of the euro.” 

As in comedy, timing is everything and de Guindos’ comments come after weeks of speculation and market frustration over whether or not Spain will seek a bailout. 

The nervousness and chagrin of European stock markets has been seen in Spanish bond yields edging up towards 6 percent and a week of choppy trade as Spanish Prime Minister Mariano Rajoy denied a report that he would seek a full bailout for Spain this weekend.

Descending from comedy to farce, the finance minister’s presentation was interrupted by protestors in the LSE audience holding a banner saying “Spain for Sale” and heckling the minister.  Unpopular austerity measures have caused several days of protests in Madrid as thousands of demonstrators called for the end of budget cuts and the dissolution of government.

De Guindos told the London audience that Spain faced no other choice.

“Sometimes governments have to take unpopular decisions,” de Guindos said. “I fully understand the discouragement of the population because of these measures, but we believe these measures are totally necessary to return Spain to a stable situation to return to growth in the future.”

Despite the laughter caused by de Guindos’ bailout comment, the economic reality confronting Spain is sobering. Unemployment now affects one in four people, and businesses, large and small, are abandoning the country in droves causing government tax revenue to tumble. 

Added to pressure on the government is a forthcoming decision by Moody’s, which could downgrade the country’s credit rating to junk status, along with warnings from Fitch and the country’s central bank governor issued on Thursday.

The chances of any light relief for Prime Minister Rajoy look slim as he attends the so-called Club Med summit in Malta this weekend.

Rajoy will meet his French and Italian counterparts, Mario Monti and Francois Hollande at the summit. 

Reuters reports that Italy and France, fearing contagion from Spain into their own beleaguered economies, will look to persuade Spain’s leader to cut to the punchline — and seek a bailout.

Source: CNBC

Spain To Request Bailout On Sept 13-14

As ZeroHedge have put it, Goldman Sachs were on the button when it came to Draghi’s announcement yesterday regarding the new Outright Monetary Transactions (OMT) program. Since Goldman Sachs practically runs the ECB, their latest prediction is for Spain to request a bailout from the ESFS by Sept 13-14.

Yesterday, when Bloomberg leaked every single detail of today’s ECB announcement, which thus means today’s conference was not a surprise at all, yet the market sure would like to make itself believe it was, we noted that everything that was leaked, and today confirmed, came from a Goldman memorandum issued hours before. Simply said everything that happens at the ECB gets its marching orders somewhere within the tentacular empire headquartered at 200 West. Which is why when it comes to the definitive summary of what “happened” today, we go to the firm that pre-ordained today’s events weeks ago. Goldman Sachs.Perhaps the most important part is this: “September 13-14: Spain to make formal request for EFSF support at the Eurogroup meeting. With a large (and uncovered) redemption looming at the end of October (and under pressure from other Euro area governments), we expect Spain to move towards seeking support.” In other words, Rajoy has one more week before he is sacked and the Spanish festivities begin.

Looking ahead over the coming months are the predictions:

Looking forward, we expect the following time-line in our base case:

• September 12: German constitutional court gives its blessing to the ESM. Although we expect some procedural riders to be attached to the decision, this would allow German ratification to be completed and the ESM to be established in relatively short order.
• September 13-14: Spain to make formal request for EFSF support at the Eurogroup meeting. With a large (and uncovered) redemption looming at the end of October (and under pressure from other Euro area governments), we expect Spain to move towards seeking support.
• Second half of September: Conditionality required by EFSF will have to be accepted by the Spanish authorities, presumably requiring a parliamentary vote. In parallel, approval of other Euro area countries for the provision of EFSF support will need to be obtained: in some countries (notably Germany), this will also require parliamentary approval.
• By end-September / early October: Memorandum of Understanding (MoU) codifying conditionality is signed, formalising the availability of EFSF support for Spain. At this point, the necessary conditions established by Mr. Draghi for ECB purchases of sovereign debt will have been met, well ahead of the large Spanish bond redemption.

Source: ZeroHedge

Spain Is Printing Its Own Euros

When the SHTF, central banks always resort to money printing. Thats all they know. Just before Ireland was forced into requested a bailout, the Irish Central Bank had to provide ELA to Irish banks to keep the system from collapsing. Reports from WSJ are that the Spanish Central Bank has had to resort to printing money ELA because of the dire situation in Spain. Meanwhile the bank jog/run continues.

As we described in detail yesterday, things are going from worse to worserer as the problems in Spain – more specifically in its banking sector – are deepening as deposit flight accelerates. As the WSJ notes PIMCOs’ comment: “A bank ‘jog’ is happening in Spain – the private sector is leaving the banking system.” But the Bank of Spain isn’t leaving anything to chance. The WSJ disconcertingly highlights that last month the central bank appears for the first time to have activated an emergency lending program that will enable its banks to borrow from the Bank of Spain directly, bypassing the ECB’s relatively tough collateral demands.

The so-called Emergency Liquidity Assistance program is shrouded in secrecy, and the Bank of Spain won’t confirm that it has been used. The Bank of Spain appears to have doled out about EUR400mm under the program, based on publicly available data. That would make Spain at least the fourth euro-zone country – following Greece, Ireland and Portugal – to use the ELA, which generally is reserved for situations when banks have exhausted all other financing options.

As we pointed out yesterday, this would appear to confirm a “full-blown bailout” is imminent, as the collateral problems mount.

 and The Bank of Spain was quick to respond to this reality (with a denial):

Bank of Spain comments in e-mailed statement on WSJ report that central bank provided ELA to lenders:

Sept. 5 (Bloomberg) — Bank of Spain says “liquidity provision to banks other than ordinary monetary policy operations represents an insignificant fraction of total lending by the Bank of Spain to financial system.”

Measures adopted to lift restrictions on interest rates on deposits is not aimed at helping banks attract deposits, central bank says

 

Source: ZeroHedge

Is Spanish Bank Run Panicking ECB Into Bond Buying Scheme?

It will come as no surprise that in light of Spain’s woes, capital has been leaving Spanish banks in droves. In July 5% of the country’s entire asset base (€74 billion) left the country. That’s over 17% in just over a year. The most likely place for those banks to come up with the cash has been selling sovereign bonds. The question remains has this prompted Draghi in recent weeks to make comments about doing “what it takes”.

A need to raise cash to meet those withdrawals may have prompted the recent bond sales, as other assets owned by banks – mainly loans and mortgages – are far less liquid. Spanish bank bond holdings are dominated by Spanish government debt, but also include those of other countries.

So where does this leave Mario Draghi? While Spanish banks are selling SPGBs, Spain has 8 bonds auctions planned in the next 6 weeks. Draghi is under serious pressure to get aggreement on a sovereign bond buying scheme. 

…..while Mario Draghi is furiously trying to come up with a bond buying plan that is endorsed by Germany, Buba and Weidmann, all of whom have, to date, said, “9-9-9”, regardless of what the final construct is, whether it includes the ECM, EFSF, and/or ECB buying bonds directly, the key distinction is that no monetary authority can buy bonds in the primary market, as that is a direct breach of Article 123/125, and absent a thorough revision of the Maastricht Treaty, investors will dump as soon as the ECB starts breaking the rules unilaterally. Certainly bonds can be monetized in the secondary market, but someone has to buy them from the government. And if Spanish banks are unable to stem the deposit outflow, there is simply no practical possibility for banks to be buying SPGBs in the primary market even as they are forced to dump them in the secondary market.

In other words, the ECB may or may not surprise next week, but unless the Spanish public is convinced its banks are safe, and the remaining EUR1.5 trillion in Spanish deposits do not explicitly remain within the Spanish bank system, anything Draghi does will be for nothing.

As for next year, the requirement to sell even more SPGBs increases by 40% on this year while competing with Spanish banks dumping bonds. The monster continues to grow. We already know from Mark Grant that Spain’s real debt/GDP figure is closer to 134%.

All in all, the total amount of gross bond issuance from Spain in 2013 could be in excess of EUR 120bn. That is around 40% higher than this year, 10-20% higher than in 2009 and almost four times larger than the average amount of Spanish bond issuance recorded in the previous four years.

 As far as another LTRO, its unlikey to suceed as Spain is fresh out of collateral.

…and the inevitable LTRO X, which the ECB will have to do in order to provide additional funding to Spain, which unlike before, however, will no longer work as Spain and the rest of Europe, are out of eligible collateral, meaning the ECB will have to get the Buba to agree to even more last minute rule changes to keep Spain “solvent.”

So, the pressure is on Draghi to push through with his Bond Purchase Plan. In fact it has been reported that he has number of options but rushing it through by giving only 24 hours to digest it before debating a solution. Serious pressure!

Sept. 1 (Bloomberg) — The euro area’s 17 national central bank governors will have about 24 hours to digest European Central Bank President Mario Draghi’s bond-buying proposal before they start debating it, three officials said.

The ECB’s Executive Board will send a list of options for the bond-buying program to the governors on Sept. 4, a day before the Governing Council convenes in Frankfurt, the central bank officials said yesterday on condition of anonymity because the plans aren’t public. The meeting concludes on Sept. 6, after which Draghi holds his regular press conference. No single policy option has emerged as preeminent, the officials said. An ECB spokesman declined to comment.

The lack of a clear preference, the complexity of the issue and the shortage of time increase the risk that Draghi won’t present a detailed plan next week, according to economists at Commerzbank AG and JPMorgan Chase & Co. The ECB may choose to hold back some details of the plan until the German Constitutional Court rules on the legality of Europe’s permanent bailout fund on Sept. 12, two of the officials said.

The battle between Draghi and Weidmann of Buba is a serious roadblock for the ECB’s plans. Another resignation from the Bundesbank would apply pressure to Merkel and with elections coming up next year and an ever ailing economy, Merkel and Germany has little room for manoeuver for backing the ECB’s Bond Purchasing Scheme. Best of luck Draghi 😉 

Mr Weidmann, the only ECB council member opposed to ECB president Mario Draghi‘s plan to buy bonds in some shape or form, has decided to remain in his post to defend his position at next week’s policy meeting, ‘Bild’ reported. The second resignation of a Bundesbank boss in as many years would send shockwaves through the markets and make it much more difficult for Chancellor Angela Merkel to soften her stance towards bailouts for countries such as Ireland.

Her room for manoeuvre ahead of next year’s general election is already shrinking as the German economy rapidly slows down. The Bundesbank has repeatedly made clear that it has deep misgivings about the ECB’s determination to press ahead with such a scheme.

Mr Weidmann’s predecessor as Bundesbank chief, Axel Weber, quit last year in protest at the ECB’s previous, now-dormant bond-buy plan. Juergen Stark, a former ECB chief economist, followed him out of the door. Earlier this week, Mr Weidmann told ‘Der Spiegel‘ magazine that bond-buying can become “addictive”, like a drug.

He added: “I hardly believe that I am the only one to get stomachache over this.”

 
Source: Zero Hedge, San Francisco Chronicle, Irish Independent

Spanish Regions Falling Apart

First Catalonia followed this week by Valencia and now it looks like the rest are queuing up for their handout. Wisdom tells you to get in their first otherwise it may be too late. But if this is happening to Spain, is Scilly only the start of it for Italy? Its more likely we will also be hearing from Italy in a similar manner.

…now virtually everyone else is set to demand a bailout. From Bloomberg: The Balearic Islands and Catalonia are among six Spanish regions that may ask for aid from the central government after Valencia sought a bailout, El Pais reported. Castilla-La-Mancha, Murcia, the Canary Islands and possibly Andalusia are also having difficulty funding themselves and some of these regions are studying plans to tap the recently created emergency-loan fund that Valencia said it would use yesterday, the newspaper said, without citing anyone.”

“Spain created the 18 billion-euro ($23 billion) bailout mechanism last week to help cash-strapped regions even as its own access to financial markets narrows.” What Spain’s perfectly insolvent and highly corrupt regions also know is that the bailout money, like in the case of the ESM, will be sufficient for one, perhaps two, of the applicants. The rest will be out of luck.

Obviously everyone is going to be looking to the Germans to bail them out, but at what price to Germany?

Where the bailout money will come from? Ultimately from Germany of course. There is however one minor glitch. Some 80 millions Germans may soon be rather angry to learn that while they are working extra hours to fund the rescue of a few insolvent windmills, their own most legendary racetrack, the Nürburgring, is facing bankruptcy as soon as next week.

……

You want to piss a German off? Stand between them and their local Formula 1 race.

Spain is fast running  out of money and fridays metldown hasn’t helped. Its gonna be a tough summer in Spain.

What is most concerning however, as FAZ reports, is that “the money will last [only] until September”, and “Spain has no ‘Plan B”. Yesterday’s market meltdown – especially at the front-end of the Spanish curve – is now being dubbed ‘Black Friday’ and the desperation is clear among the Spanish elite. Jose Manuel Garcia-Margallo (JMGM) attacked the ECB for their inaction in the SMP (bond-buying program) as they do “nothing to stop the fire of the [Spanish] government debt” and when asked how he saw the future of the European Union, he replied that it could “not go on much longer.” The riots protest rallies continue to gather pace as Black Friday saw the gravely concerned union-leaders (facing worrying austerity) calling for a second general strike (yeah – that will help) as they warn of a ‘hot autumn’. It appears Spain has skipped ‘worse’ and gone from bad to worst as they work “to ensure that financial liabilities do not poison the national debt” – a little late we hesitate to point out.

Source: ZeroHedge

Spain: Close To the Edge And Soon To Be Eating Manure

As reported in ZeroHedge, Spanish bond yields went over 7% and the Budget Minister in the Spanish Parliament this morning came out with the line 

“There’s no money in the public coffers.”

What a start to the day but it got even worse than that from the Minister

The Budget Minister went on in Parliament, this morning, to proclaim that “There is no money to pay for public services” which is quite a statement to make after the Prime Minister had told everyone that Spain was fine and that only the banks were having some issues. Of course this same Prime Minister said bailing out the Spanish banks was a “Great victory for Europe” so we already know that he is suffering from some serious psychological deficiencies and needs some help. Poor Mr. Rajoy; where is Sigmund Freud when you need him?

“The European Central Bank intervened in the secondary market to buy public debt to avoid the European monetary system collapsing. Spain would have collapsed without this intervention.”

                  -Budget Minister Montoro in Parliament this morning in Madrid.

Economists are not noted for their humour but this story is a classic.

Recently two noted Spanish economists were interviewed. One was always an optimist and one was always a pessimist. The optimist droned on and on about how bad things were in Spain, the dire situation with the regional debt, the huge problems overtaking the Spanish banks and the imminent collapse of the Spanish economy. In the end he said that the situation was so bad that the Spanish people were going to have to eat manure. The pessimist was shocked by the comments of his colleague who had never heard him speak in such a manner. When it was the pessimist’s turn to speak he said that he agreed with the optimist with one exception; the manure would soon run out.

 

Spanish Bailout Imminent

Its been coming a long time, but with rising bond cost a bank bailout and worsening economy it’s just a matter of time now for Spain to formally look for a bailout. It looks as if that has been discussed at the G20 meeting if you read between the lines. Time will tell but I believe Mario Monit’s quote below sums it up. The Slog discusses as follows:

WORDS: “The G20 wishes to express its alarm about the eurozone crisis”

(Opening statement)

“We can see that the markets are not convinced. We must draw up a definitive and clear road map with concrete actions that make the euro more credible.” (Mario Monti)

With Spain perhaps days away from requiring a full sovereign bailout, its bond yields rising above 7%, persistent rumours of a time bomb waiting to go off inside La Caixa, and Slog sources in Madrid of the opinion that “a full bailout is imminent, there is not a chance Rajoy can beat the markets. A total bailout is now unavoidable”, the anodyne quotes from Mexico floated unsteadily about like ethereal gloop on the air.

The Slogs source in Spain commented as follows:

“Spain can only wait another two weeks, unless Rajoy gets some under-the-table money from the [European] Central Bank. That’s possible of course, you never know any more.”

It seems hard to imagine that any money coming from that direction will be real: given that Greece was bailed out with some paper signed by Mario Draghi, the best Madrid could hope for would be some used Frankfurt bus tickets.

Finally, here is one I wasn’t expecting.

Is there any upside? Oddly enough, yes, there is: at long last – with the time at 3 seconds past midnight, Scameron is hinting darkly at moving away from european markets, and re-establishing a strong commonwealth relationship. This tells us just how impossibly bad things are in the eurozone, and that the EU as we know it today is crumbling into dust. For our Prime Minister lacks the courage to back anything that isn’t a certainty. (Except the rapidly disappearing HS2, of course).

 

 

 

Spanish Bailout Won’t Work

Charles Dumas (Lombard Street Research) proposes a good explaination of why the Spanish bailout won’t work.

The Spanish bail-out was a typical example of half-measures. It seemed clever to insulate Spain a week ahead of the Greek elections, so that “Grexit” could be possible without immediate major contagion into Spain. But Spanish banks needed equity, not debt funding that would leave them as insolvent as before. So the provision of debt funding by the Eurozone required the Spanish government as intermediary, to turn the debt – now effectively national debt – into equity for its banks. So private holders of Spanish government debt have effectively been subordinated – and will be for each further tranche of aid that is needed in future. Thus contagion was worsened, and quickly spread to Italy, which can only too clearly not afford its share of the Spanish bail-out.

Source: BusinessInsider

ECB Needs To Intervene In Spanish Debt Crisis Or Game Over

Spanish 10year bond yields hit over 7%, the magical number after the downgrade yesterday. Clearly this is unsustainable when coupled with the banking crisis that Spain is also experiencing. Ambrose Evans Pritchard in the The Telegraph discusses the need now for the ECB to enter the scene.

We’re facing maximum tension. The situation is unsustainable over time,” said the country’s finance minister Luis de Guindos. Yields on 10-year Spanish bonds yields punched to almost 7pc, above levels that triggered ECB intervention to back stop Spain last November.

“The ECB needs to intervene very quickly or it is game over,” said Nicholas Spiro from Spiro Asset Management. “There is a whiff of capitulation in the air.”

The dramatic escalation comes just days after the eurozone agreed a €100bn rescue package for the Spanish state to recapitalise its crippled banks. “It is very worrying. Markets are behaving as if the eurozone is heading for break-up,” said Jens Sondergaard from the Japanese bank Nomura.

France’s industry minister Arnaud Montebourg said the markets were flying out of control because the ECB was failing to take charge. “We need an ECB that does its job,” he said.

……….

“We must have a real circuit breaker,” said Sondergaard. “The question is whether the ECB will now blink and go down the route of quantitative easing (QE)”.

He said the ECB should slash interest rates by half a point to 0.5pc and “pre-commit” to half a trillion euros of QE over coming months, blanketing the Spanish and Italian bond markets.

Nomura said the ECB must act with overwhelming force rather than engaging in piecemeal bond purchases that fail to restore confidence and have the toxic side-effects of pushing existing bondholders down the credit ladder — the dreaded effect of “subordination”.

“The eurozone has the wrong policy mix across the board. Fiscal policy is too tight; monetary policy is too tight; and the tough regulation of the banks is coming at the wrong time. Together it is all pushing the eurozone to breaking point,” he said.

Spanish premier Mariano Rajoy said in a private letter to EU leaders last week that the ECB is the only body with firepower and nimbleness able to contain the crisis at this point.

Well, one things for sure, somethings gotta give.

Spain Worse Than Uganda

Above is the text message Spanish Prime Minister Rajoy allegedly sent to Finance Minister Guindos before the latter went in for a last round of negotiations on the terms of a bailout for Spain’s banks. He’s urging Spain to hold out for a good deal. “We’re the number four power in Europe,” it says. “Spain is not Uganda.”

Now it appears that Spain are worse than Uganda as Egan Jones the ratings agency has downgraded Spain to CCC+ negative outlook. Uganda has a B rating.

Source:ZeroHedge, slate.com

 

Spanish Bailout – Nigel Farage & Ken Livingstone

Nigel Farage and Ken Livingstone give their take on the Spanish bailout.

Spanish Bailout Opens Can Of Worms

It was a long time coming but many independent economists and analysts were vindicating in their analysis of Spain. The bank bailout details have yet to be fleshed out but Bloomberg reports that the bailout Spain is looking for is €100 billion which is a staggering 10% of GDP. This is to be injected into the FROB, or the Fund for Orderly Bank Restructuring. There have even been reports of up to €250 billion is needed to shore up the banks.

Spain asked euro region governments for a bailout worth as much as 100 billion euros ($125 billion) to rescue its banking system as the country became the biggest euro economy so far to seek international aid.

Spain’s true debt/GDP is 134% already as reported by Mark Grant. This will surely overload Spain’s economy.

Already Ireland is demanding the exact same deal. After accepting their original bailout deal in return for extreme austerity, it looks as if Spain is to escape that part. What a can of worms Germany has just opened as surely the Greeks will also demand similar treatment.

Ireland wants to renegotiate its rescue plan to benefit from the same treatment as Spain, which looks set to win a bailout for its banks without any broader economic reforms in return, European sources said on Saturday.

“Ireland raised two issues: one is the need to ensure parity of the deal with Spain retroactively on its bailout from EFSF,” one European government source told AFP, referring to the temporary rescue fund, the European Financial Stability Facility.

Another European government source confirmed the information.

Ireland secured an 85-billion-euro ($112 billion) rescue deal from the European Union and the International Monetary Fund in November 2010, but only after agreeing to draconian austerity measures.

Unlike Ireland, Spain’s economy minister said a deal on financing for the country’s troubled banks would not impose any conditions on the wider economy.

Where is the money to come from. The Germans have had problems ratifying the ESM, and the ESFS is looking a little bare.

The problem with this is that the ESM has yet to be ratified by Germany, whose parliament said previously it is sternly against allowing the ESM to fund a direct bank bailout, something which just happened. Thus, the successful German ESM ratification vote, whenever it comes, and which previously was taken for granted, now appears to be far more questionable.

Which leaves the EFSF. The problem with the EFSF is that there is about €200 billion in dry powder. And this includes the Spanish quota of €93 billion, which we can only assume is now officially scrapped.

As the economic hitmen make their way across the eurozone, its only a matter of time before Italy is next. Where then, does the money come from to bail them out as over €500 billion is already commited to the other PIIGS.

And ironically, what just happened, is that the Eurozone, with the tacit agreement of Germany, essentially gave insolvent banks a green light to short themselves into a full bailout.

How long until Italian banks get the hint, and proceed to short each other, or themselves, either with shares of stock or , better yet, through CDS which unlike in the sovereign case, can be held without an offsetting cash basis position. In other words: is it time for the Italian bank suicide trade?

Because only when they are on the verge of nationalization, will Italian banks be rescued. And remember: he who defects (or in this case drops the fastest), first, reaps the biggest benefits of the resultant action.

Finally for any Spanish readers, check out what Mariano Rajoy said on May 28( a few weeks ago) : “No va a haber ningún rescate de la banca española“, “There will be no rescue of Spanish banks”. WHAT A LIAR. Comes with video footage so you can see how he looks when he lies(for future reference).

 

 

 

Previous Related Stories:

Spain Heading For Full Collapse Of Economy (ZeroHedge)

Gonzala Lira – Spain Needs To Exit Euro And Devalue

Gonzalo Lira Believes Spain Will Exit The Euro

Spain Final Nail In euro Coffin

Spains Debt/GDP At 134%

Spain’s Woes Caused By Euro

Source: France24, Bloomberg, Zerohedge, neuvatribuna.es

IMF Denies Bailout Talks With Spain

The Spanish Deputy Prime Minister Soraya Saenz de Santamaria flew into Washington for talks with IMF Managing Director Christine Lagarde and U.S. Treasury Secretary Timothy Geithner under the guise of talks about bailing out Spanish banks, admit rumours of bailout talks, to which the IMF have denied. Bit of a coincidence 😉 

WASHINGTON (AP) – The International Monetary Fund says it has not been asked by Spain for a bailout and has not begun preparing one.

IMF spokesman Gerry Rice spoke Thursday as Spanish Deputy Prime Minister Soraya Saenz de Santamaria flew into Washington for talks with IMF Managing Director Christine Lagarde and U.S. Treasury Secretary Timothy Geithner. The officials were discussing how Spain can finance an overhaul of its banking sector.

Saenz de Santamaria said that it was coincidental that she was coming to Washington in the midst of the banking crisis because her meetings were scheduled months ago.

The government nationalized a major bank earlier this month. It now says it will need to inject $23.6 billion in public money into the bank – more than twice what the government had estimated.

Doubts over how recession-hit Spain will handle the bailout have sparked concerns that the country will soon follow Greece, Portugal and Ireland in asking for financial assistance.

Lagarde called her meeting with Saenz de Santamaria productive. She also denied a Wall Street Journal report that the IMF was drawing up plans for a rescue loan for Spain.

“There is no such plan,” she said.

Saenz de Santamaria said that she discussed with Geithner some of the ideas being discussed in Europe about how to set up a fund to recapitalize European banks.

You know what they say

…it isn’t true until its officially denied ….

Source: MSNBC

Investors Pulling Out Of Spain

In recent weeks we heard stories of deposits being pulled in Greece, now the contagion has spread to Spain. The ECB has stated that private investors and companies are withdrawing from Spanish financial institutions at the worst possible time. Having to cope with bailing out Bankia and rumours of other banks needing funding, stock market falling, bonds rates reaching 7% and todays downgrade of 8 autonomous regions, this is going to hit Rajoy how is already struggling to keep Spain from needing a bailout. The inevitable most happen.

Investors are fleeing Spain as the financial crisis worsens while Madrid battles to contain fears of an economic collapse.

The European Central Bank said on Wednesday that private individuals and companies are withdrawing their money out of Spanish Banks.  Data shows private deposits at Spain’s financial institutions fell by more than 30 percent in April. The interest rate on Spain’s 10-year bonds rose to 6.703 percent as the country battled to avoid being the next victim of the eurozone crisis. Stock prices fell all over the world and Madrid’s IBEX-35 index slumped 2.58 percent to a nine-year low at 6,090.4 points. The euro slumped to a two-year low versus the US dollar amid fears that Spain could be forced into asking for a bailout for its ailing banks.

………

Also on Wednesday, the European Commission said Spain is on top of the list of the eurozone 12 critical economies due to the countries’ deepening financial crisis.

Spain’s central bank reported on Tuesday that Spain’s economy would shrink in the second quarter of 2012, with the recession expected to continue until at least mid-2012.

Battered by the global financial downturn, the Spanish economy collapsed into recession in the second half of 2008, taking with it millions of jobs.

The worsening eurozone debt crisis has raised Spain’s financing costs and raised concerns that the country might have to seek a European Union bailout, like Greece.

 

Source: PressTV

Spain To Fund Bankia By Using The ECB in “Cash For Shit Exchange”

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

Bizarre Has Been Reached – Ronaldo and Kaka Used As Collateral

Just when you thought it couldn’t get even more bizarre. Christiano Ronaldo is now to be used as collateral with the ECB.

From Presseurop.eu: “The most expensive footballer in history may now be used to guarantee the solvency of a Spanish bank. “Ronaldo in the bailout fund,” headlines Süddeutsche Zeitung. The daily reports that the Bankia group of savings banks, which financed Real Madrid’s acquisition of the Portuguese player, is now seeking to borrow funds from the European Central Bank. In response to the ECB’s demand for guarantees, Bankio are putting up… Ronaldo and the Brazilian Kaka, who also plays for the Madrid football club. In 2009, Real borrowed 76.5 million euros to pay transfer fees of 100 millions euros to Manchester United, and 60 million to Milan AC.”

“Could we see a situation in which the ECB seizes one of the players?“ wonders the Munich daily. “In theory, it is possible. Bankia would first have to become insolvent. Thereafter, Real would have to default on its loans, which are secured by advertising and television revenues. It goes without saying that Real Madrid is in debt to the tune of several million euros. However, in Spain football clubs have a history of obtaining publicly funded bailouts — just like the country’s banks.”

Source: ZeroHedge

Spanish Debt Soaring From Greek Crisis

Source: PressTV

 

Germany Surrenders To Money Printing

John Maudlin writes on the BusinessInsider of his prediction finally coming true. Germany notoriously deadpan against printing money due to its experience of Weimar hyperinflation had no solutions left to turn to, other than turning on the printing press. After all the LTROs worked for a short period but weren’t enough.

The simple fact is that Mario Draghi, the Italian president of the ECB, created €1 trillion euros to help fund European banks, which promptly turned around and bought their respective countrys’ sovereign debt. Germany’s Angela Merkel forced the Bundesbank to “play nice” and go along with what was seen as the only way to solve a growing banking crisis in Europe. Everyone breathed a sigh of relief, thinking that this at least bought a year during which things could be sorted out. But it turns out that a trillion euros just doesn’t go as far as it used to. The “relief” lasted about a month. The last few weeks have presented yet another budding crisis, as least as large as the last one. Where to get the next trillion?

This week the German Bundesbank waved the white flag. The die is cast. For good or ill, Europe has embarked on a program that will require multiple trillions of euros of freshly minted money in order to maintain the eurozone. But the alternative, European leaders agree, is even worse. Today we will look at the recent German shift in policy, why it was so predictable, and what it means. This is a Ponzi scheme that makes Madoff look like a small-time street hustler. There is a lot to cover.

The plain truth.

It is the world’s worst-kept secret: Germany does not want inflation but wants to abandon the European Union even less. And as we will see, the eurozone simply does not have enough money to keep itself together without massive ECB intervention.

Bild and Spiegel Online ran with stories of inflation stoking up deep-seated fears and memories from days gone by. The Bundesbank came out with a statement to try to prepare the German people.

“The panic-mongering was prompted by a statement by a senior official from the Bundesbank, Germany’s central bank, to the finance committee of the German parliament earlier this week. Jens Ulbrich, head of the Bundesbank’s economics department, said that Germany is likely to have inflation rates ‘somewhat above the average within the European monetary union’ in the future and that the country might have to tolerate higher inflation for the sake of rebalancing national economies within the euro zone.

Maudlin continues with the state of the Spanish banks which are much worse than many realize.

I have been writing for almost two years about the fact that the cajas, or Spanish regional banks, are worse than bankrupt. US banks are shut down when their nonperforming loans are at 5% of their capital. Spanish banks are at 20% and rising rapidly. My coauthor Jonathan Tepper and I spent a whole chapter in Endgame on Spain, at the end of 2010. This week the Spanish government basically nationalized Bankia, the nation’s 4^th largest bank, which had been cobbled together from seven failed cajas and given a large government guarantee and a €3 billion public-offering equity infusion. Only roughly half of its real estate loans are generating returns, and that is the number for public consumption.

The write downs are not enough and the eventual recapitalization will need to be extremely large.

“Aside from creating a financially unsound bank, the government also demanded an additional 30 billion euros worth of write-downs on loans – valuing 84 billion euros in total, when combined with the original requirement of 54 billion euros in write-downs. The combined write-down program is, however, unlikely to be sufficient to address the close to 180 billion euros in toxic assets held by Spanish banks. Furthermore, many of Spain’s struggling banks will be unable to maintain the core tier-one capital ratio required by EU regulations without the government’s assistance. Spanish banks will require an estimated 100 billion-250 billion euros in recapitalization later this year to reach this capital ratio target – a significant percentage of which will have to be shouldered by Madrid.

Maudlin breaks down the debt and commitments that the Spanish government has, which breaks down similar to what ZeroHedge reported.

We are talking the need for new Spanish-government debt amounting to roughly 25% of GDP that will be needed just this year, and that’s if things don’t deteriorate beyond present assumptions in their real estate sector. Care to make a wager on how sound those assumptions are? About as sound as Rajoy’s assessment, only a few months ago, that no public money would be needed, perhaps?

Let’s do some basic math. Spanish banks took down some €352 billion in the LTRO (created by the ECB), or over 1/3 of the total amount. They have about €80 billion left after deposit outflows and buying sovereign debt. Which will be needed to buy yet more Spanish government debt, so they can be bailed out.

As near as I can tell, Spain is guaranteeing about $20 billion of the new IMF funds that will be used for a European bailout. Spain already has $332 billion of liabilities to the ECB, $125 billion to the stabilization fund, another $99 billion for something called the Macro Financial Asset Fund, and various guarantees for other bank and European funds, all of which totals over $600 billion, give or take. Their public debt-to-GDP ratio is only 69%, but add in these other guarantees and commitments and you get over 130% debt-to-GDP. And that is before they start bailing out their banks, and before any additional debt from their fiscal deficit, which is running at 8%. (Yes, I know they say it will be around 5%; but they are in a deepening recession; unemployment is rising at an alarmingly high rate, which lowers revenues and increases government spending; and their bond costs are rising).

 

So what state is France in?

“However, the fundamentals are much grimmer. France has not balanced its books since 1974. Public debt stands at 90% of GDP and rising. Public spending, at 56% of GDP, gobbles up a bigger chunk of output than in any other euro-zone country – more even than in Sweden. The banks are under-capitalized. Unemployment is higher than at any time since the late 1990s and has not fallen below 7% in nearly 30 years, creating chronic joblessness in the crime-ridden banlieues that ring France’s big cities. Exports are stagnating while they roar ahead in Germany. France now has the euro zone’s largest current-account deficit in nominal terms. Perhaps France could live on credit before the financial crisis, when borrowing was easy. Not anymore. Indeed, a sluggish and unreformed France might even find itself at the center of the next euro crisis.”

The banks of France are over 4 times the size of French GDP. The markets have been punishing the larger banks, with some of them down almost 90%.

While French banks are not the problem that Spanish banks are, they are far larger relative to the size of their home country. Even a small problem can be large for the country. And French banks have very large exposure to European peripheral debt. A default by Spain would push them (and a lot of other European banks) over the edge. Which is one reason that Sarkozy was so loudly insistent that any bank problems should be treated as a European problem and not the problem of the host country. (Interesting idea if you are Irish!) France simply cannot afford to deal with any problems in its banks while it is running such large deficits. And not while it is guaranteeing all sorts of European debt, which is at the heart of the problem. Germany needs France to help shoulder the financial burdens of Europe. And as long as France can keep its AAA rating, Germany has a partner. But if France loses that rating, then any European debt it guarantees clearly loses that rating as well.

S&P has already taken France down one notch to AA+ and still has a negative outlook. Moody’s has warned of a possible downgrade to France. Italy now has a BBB+ rating, just below that of Spain. When you look at the actual balance sheet and total debt, France is not all that far from further downgrades, unless it embraces a new budget ethic, which is precisely what Hollande has said he will not do.

That would be a real crisis for the eurozone. German voters might not be willing to shoulder the European burden without a full partner in France.

And there you have it, the reasons for the German u-turn.

Is there any wonder about the timing of the Bundesbank retreat? They looked at Greek and French elections and then at the ongoing Spanish crisis, which is trending from very bad to awful with a risk of horrific. They glanced at the balance sheets of their own banks and those of French banks vis-à-vis sovereign debt from peripheral Europe, then took a peek at German-voter polls and flipped through their own balance sheet, and decided that the only entity with enough money to stem the crisis was the ECB. And that means a “little” inflation.

I think the vast majority of Germans (and to be fair, the entire world) have no idea how many trillions of euros are going to be needed to keep patching the leaky ship that is the eurozone. It is even possible that most German politicians actually think it might only be 3% inflation.

Spain is too big to save and too big to fail. The only way for Spanish debt to remain at 6% is for the ECB to basically buy it (or lend to Spanish banks so they can buy it, or whatever creative new program Draghi and team can think up). When Spain goes, it is just a matter of time before we lose Italy and then, yes, even France. The line must be drawn with Spain. And the only outfit with a balance sheet big enough that can also do it in a politically acceptable manner is the ECB, and the only way they can do it is with a printing press.

Thanks for the hangover 😉

They will do whatever it takes to keep the European Union and eurozone together. And whatever it takes is a very open-ended plan. But it is going to cost them trillions of euros.

Someone is going to have to pay that bar bill. And there’s going to be one helluva hangover.

Hedge Funds Line Up Against Spain

Its a cruel world in finance. After working their way through Greece and Spain, hedge funds are now eyeing up whats on offer in Spain.

(Reuters) – Hedge funds have spotted money-making opportunities in Spain, betting that market fears over the southern European country’s deepening debt crisis have made some assets too cheap relative to other securities.

Managers have been exploiting what they see as the mispricing of credit default swaps, government and corporate bonds and stocks, after months of growing market concern that Spain might need an international bailout, using relative value trades – betting on one security versus another.

…

The moves echo the earlier stages of the euro zone crisis, when hedge funds – renowned as being among the nimblest of investors – bought CDS – designed to pay out in the event of default – on Greece and other weaker euro zone countries.

When the trade became more popular they quickly took profits and moved onto countries such as France and Belgium.

Spanish stocks are already suffereing.

Spain’s stocks .IBEX have tumbled 17.1 percent this year while the 10-year government bond yield has risen from less than 4.7 percent at the start of February to more than 6 percent earlier this week as investors fretted over its debt-laden banks and consumers and its shrinking economy.

A number of hedge funds bought Spanish CDS at the start of the month, say industry insiders, helping drive up the price to more than 500 basis points earlier this week from below 350 basis points in February.

..

Some funds who have long-term bets on Spanish banks recovering and who are unwilling to sell at current prices have gone short a basket of Spanish stocks as a hedge, specially weighted to counter further sharp falls in bank stocks.

“If banks are a long-term position for you you’ve maybe put on a market hedge, but because banks have higher beta you’ve overhedged,” the prime broker said.

Its not just Spain who should be worried. France has not escaped attention either.

“We all agree that Spain is facing many difficulties, but so are other neighbouring countries. I find it more interesting to buy France or Portugal CDS at current levels,” he said.

“France is interesting, as, if Mr (Francois) Hollande is elected President, he will certainly request an audit of public accounts, which will certainly not look nice.”

Source : Reuters