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November, the government withdrew €4 billion from the reserve fund to pay pensions, the second time in history it had withdrawn cash.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

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Another country has joined the list for limiting cash transactions by it citizens. Mexico has signed into law, a ban on large cash transactions carrying a minimum penalty of 5 years in prison.

Large Cash Transactions Banned In Mexico … Outgoing Mexican President Felipe Calderon has signed into law a ban on large cash transactions. The ban will take effect in about 90 days and it is part of a broader effort to control monetary flows within the country. Under the law, a Specialized Unit in Financial Analysis operating within the Attorney General’s Office will be created to investigate financial operations “that are related to resources of unknown origin.” For real estate transactions, cash payments of more than a half million pesos ($38,750) will be forbidden and, for automobiles or items like jewelry, art, and lottery tickets, cash payments of more than 200,000 pesos ($15,500) will be forbidden. The law carries a minimum penalty of five years in prison. – Forbes

and as the Daily Bell put it

The power elite intends to lock down the world, it seems, in order to track every monetary transaction of any significance.

We wrote about this trend previously in “Spain Bans Cash.” Here’s an excerpt:

… As we have long predicted, the phony “sovereign debt” crisis in Europe is being used to justify all sorts of authoritarian measures.

…..

these national bans continually pressure more and more freedoms, including the freedom of shielding one’s wealth from prying eyes. And that’s just the point …

In the last 2 years the following countries have made similar restrictions.

Source: The Daily Bell

IMF Hints At EuroZone Nations Introducing Capital Controls

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Now you know things are bad when there is talk of “capital controls”. Just ask the Argentinians. The IMF has hinted that it maybe time for eurozone nations bring in capital controls as reported below by ZeroHedge.

In a most intellectually disingenuous statement, European leaders recently announced that Spain is A-OK and would not require a bailout. I suppose it’s true to a degree. Spain doesn’t really need a bailout. More like an exorcism. Or at least last rites.

After all the debt, austerity, government collapse, riots, etc., there’s a new crisis du jour here: the banking system. Individuals, businesses, and institutions are all predicting a breakup of the eurozone, and nobody wants to have cash in this country on the day they introduce a new currency (and then immediately proceed to devalue it.)

Consequently, depositors are moving money out of the country en masse, often to the tiny principality of Andorra next door– a highly capitalized, low tax banking jurisdiction. This leaves the already thinly-capitalized Spanish banks in an even weaker position.

As you probably know, the way the banking system works in most of the world is a complete fraud. Most banks only hold a tiny percentage of their customers’ deposits in cash. The rest is ‘invested’ (gambled) or loaned to a bankrupt government.

This is a high-risk model that only works well when people have tremendous confidence in the system. The moment there are more than a handful of depositors wanting their money back, the bank has a big problem.

This is happening nationwide in Spain, so the entire banking system has a problem. Nearly every bank here is technically insolvent… and yet they have droves of customers trying to withdraw funds that aren’t there.

As such, the IMF is now recommending that Spain (and other nations in the eurozone periphery) take action “at the national level” to stem this flight of funds and prevent people from moving money abroad.

Of course, they won’t come right out and say it, but there’s a name for ‘national level’ action to stem the international flight of funds. It’s called capital controls.

This is when governments restrict the free-flow of funds across borders, often -requiring- that citizens hold a rapidly depreciating currency at sub-inflation rates.

It’s one of the worst forms of theft imaginable– robbing the purchasing power of people’s savings and incomes, all to meet some unachievable objective, or for ‘the greater good’ as defined in the sole discretion of the ruling elite.

Over the summer while in Europe, I saw early signs of capital controls being rolled out.

In Italy, for example, the government imposed bank withdrawal limits… essentially holding people’s savings captive. Then they initiated strict border controls with Switzerland in an attempt to thwart citizens trying to sneak cash out of the country.

It’s going to happen here in Spain as well. And unfortunately, the people who didn’t see the writing on the wall and take action early are going to find the door shut in their faces by the next wave of regulation.

Moving some savings abroad isn’t the sort of thing where you want to run with the crowd. As with anything, the dynamics change quickly when the idea becomes mainstream. Smart, thinking people ought to recognize the signs early and be well ahead of the crowd.

 

Source: ZeroHedge

 

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

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