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

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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November, the government withdrew €4 billion from the reserve fund to pay pensions, the second time in history it had withdrawn cash.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

 

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Spanish Minister Laughed At For Bullshitting

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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.

Spanish Economy Minister Luis De Guindos Addresses Media
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

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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

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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?

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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

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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

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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.

 

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