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Thursday, July 19, 2012

Fresh details on the Spanish bank bailout... again from abroad

We assume many Spaniards are growing more and more frustrated with the fact that they have to dig into the websites of foreign governments and parliaments to find out details of the bank bailout their country is set to receive. After the 'confidential' EFSF proposed timeline we took from the website of the Dutch finance ministry and analysed on our blog, new information emerged from the dossier the German finance ministry prepared from German MPs ahead of today's vote on the Spanish bank bailout in the Bundestag (available here).

The 139-page dossier includes a "Master Financial Assistance Facility Agreement" - never seen before - between Spain, the Spanish national Orderly Bank Restructuring Fund (FROB), the Bank of Spain and the EFSF. The draft agreement confirms that, as expected, once the eurozone's permanent bailout fund, the ESM, takes over, the loans Spain receives will not become senior to Spanish debt held by private investors.

However, the most interesting part (see page 78 of the dossier) concerns the fact that, in principle, Spain could request that part of the €100 billion rescue package be used for purposes other than bank recapitalisation - including direct loans to the Spanish government and purchases of Spanish debt on both the primary and the secondary markets.

In other words, if it turns out that Spain does not need the entire amount to sort out its troubled banking sector - which the government has suggested will be the case (although we don't agree, see here) - it could, for instance, ask its eurozone partners to use the cash left to buy Spanish bonds and try to keep its borrowing costs down.

This would imply a revision of the Memorandum of Understanding (MoU), which would almost certainly include tougher conditions - probably directly relating to government spending and reforms as well. All very speculative at the moment, but it's still interesting that the agreement opens for Spain seeking something closer to a fully-fledged bailout deal.

A European Commission spokesman has just told reporters in Brussels,
"The up to €100 billion, which the eurozone has undertaken to provide to Spanish banks is to do just that, it is only for that purpose and not for any other."
This seems to be only a half-truth, though. In fact, the draft agreement does indeed specify that, for the moment, the entire amount is being provided in the form of a "Bank Recapitalisation Facility". However, the document also establishes that Spain can make an official request to move part of the money to another facility, provided that the combined total does not exceed €100 billion. 

In any case, the bailout agreement will be wrapped up by eurozone finance ministers in their conference call tomorrow. Meanwhile, the day has not started well for Spain. In this morning's debt auction, almost €3 billion of medium and long-term debt was sold, but with higher interest rates and significantly lower demand than in the previous auction. The interest rate on Spain’s ten-year bonds reached above 7% again – a level widely seen as unsustainable.  

All this happened while Spanish Treasury Minister Cristóbal Montoro (in the picture) was telling MPs that “There is no money in the public coffers to pay for services.” As usual, you can follow the latest developments of the eurozone crisis via our Twitter feed @OpenEurope.


Rik said...

Anyway 40 Bn or so that could be left after bankrecap. is nowhere near enough to start a credible secundary market buying scheme. Especially as the amount would be known and is clearly too low for that.
At the moment people are not selling because they probably have to account for losses if they did. When a secundary buying programm has to be started /is started another 'decisionmakingmoment' will arrive: take small losses now or run the cjance on huge losses later?

Rik said...

Interesting interview/article in Handellsblat, with Herzog.
He points to the fact that ECB printing or similar operations are according to him unconstitutional in Germany. While transferring 's tasks to the ECB it was done under the condition that it was basically with as main task maintaning pricestability.
Mass printing or QE or acting as a bank for the ESM (basically all printing press operations) all inflate away the problem (if not already transfer it to the German taxpayer, which is a constitutional problem for another reason).
I understood that the BuBa could demand the tasks back from the ECB in such case.
Anyway this will likely start to play via the Constitutional Court if substantial printing press operations would be close. Effectively imho most likely killing them off like we have seen with Eurobonds as a referendum in Germany simply cannot be risked.

Probably interesting for you to have a look at as it makes half the (often unrealistic) rescuescenarios completely unrealistic and next to the UK's position the EZ crisis is likely the main issue in the EU at the moment.

Rollo said...

Listen to the markets. 7.5% yield on Spanish bonds..

Anonymous said...

It seems that at long last the ECB is doing something to actively engage Spain in an accelerated recovery, or rather protection of default (of which, some argue, it was never in fear of). The following is pretty much the latest of what’s out on the case (I read it just this morning) so I hope it may be of some interest to you as well - http://www.pressdisplay.com/pressdisplay/showlink.aspx?bookmarkid=5HY4PMBUVCN8&preview=article&linkid=221ae47b-5f2e-41fd-8681-2ce9f4010ba7&pdaffid=ZVFwBG5jk4Kvl9OaBJc5%2bg%3d%3d