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Tuesday, July 10, 2012

An intense Eurogroup meeting for Spain

As expected, yesterday's was an intense Eurogroup meeting for Spain, with several key issues on the table. Here's a summary of what happened and what was (or wasn't) decided:
  • Eurozone finance ministers reached a "political agreement" over the Spanish bank bailout. The final amount of the rescue package has yet to be nailed down, although Dutch Finance Minister Jan Kees de Jager has suggested that the Spanish government could eventually go for the entire €100 billion pledged by the Eurogroup (which, as we have previously noted, may not be enough);
  • For the moment, it has been decided that Spain will receive a first tranche of €30bn by the end of the month. Eurogroup chairman Jean-Claude Juncker told the press that this money would be held as a "contingency in case urgent needs" arise in the near future;
  • The money will initially go through Spain's national bank restructuring fund (FROB) and will therefore count as additional public debt. Once the eurozone has its single banking supervisor - not earlier than next year, according to both German Finance Minister Wolfgang Schäuble and ECB Executive Board Member Jörg Asmussen - Spanish banks will be allowed to get funds directly from the eurozone's bailout funds, and the debt will be written off the government's balance sheets;
  • The loans will have a maturity of up to 15 years, and 12.5 years on average, Juncker said. Spanish Economy Minister Luis de Guindos (in the picture with Juncker) has suggested that the interest rate "could be even lower" than the 3-4% widely reported in the Spanish media during the past few weeks;
  • The conditions attached to the rescue package remain unclear, as the Memorandum of Understanding will only be signed at the next meeting of eurozone finance ministers on 20 July - i.e. after the Spanish bank bailout passes parliamentary votes in Germany, the Netherlands, Finland and others. However, the Spanish press reports that the conditions will almost certainly include tougher capital requirements for Spanish banks and the creation of a big 'bad bank' to house the troubled assets held by the Spanish banking sector;
  • Eurozone finance ministers also agreed to give Spain one extra year to bring its deficit below 3% of GDP. The revised deficit targets are: 6.3% of GDP (instead of 5.3%) for 2012, 4.5% of GDP (instead of 3%) for 2013 and 2.8% of GDP in 2014. In return for the extra year, Spain is expected to stick to the recommendations made by the European Commission earlier this year - which include, among other things, a VAT increase and stricter control over regional spending (the latter is much easier said than done, as we noted here);
  • Despite the Spanish government consistently stating the opposite, los hombres de negro (the men in black) from the European Commission will indeed travel to Madrid every three months to assess how things are getting on.   
  • On a slightly separate note, Spain came out as the big loser in yesterday's assignment of top jobs in the eurozone - possibly unsurprisingly, since it was also holding out its hand for huge amounts of aid. Luxembourg's Yves Mersch has been nominated to replace Spain's José Manuel González-Páramo on the ECB Executive Board – making Spain the only big eurozone economy not to be represented on the six-man Board. Madrid also failed to have its candidate – Treasury official Belén Romana García – appointed as chairman of the ESM, the eurozone’s permanent bailout fund. The post is to be assigned to current EFSF chairman, Germany's Klaus Regling.
Once the Memorandum of Understanding is finalised and made public, it will be possible to make a more thorough assessment. For the moment, once again, markets do not seem to have been impressed by the agreement - the interest rate on Spain's ten-year bonds remains around 6.9% this morning, very close to the 7% threshold widely seen as unsustainable.


Rik said...

So the EZ is going to subsidise the Spanish bankingsector. 3-4% may be lower hardly looks like market conditions. Why didnot they make a convertible of it?
3-4% is of course low for Spain itself as well. But that could be seen in the larger bail out picture. But this is for loans that according to planning end of the years will be with the banks themselves?
Convertible so you can keep the interest low (and cash out flow subsequently) and if the rescue is successful the investor E-thing gets a high reward by way of very cheap shares.

Rik said...

Rather confusing. Whether that is because of the usual incompetence or that there are still some disagreements we will have to see.
Text on El Pais also on FTAV for instance. You probably had it before I did, just to be sure.

Schauble is stating that there will remain a government guarantee. That it is only done to get it off Spain's books. Which imho as said earlier is doubtful if that will work (if the aim is reducing borrowing costs). In private enterprise the experience is when you massively advertise: 'we are doing Off BS financing', it basically doesnot do you any good.

3-4% as stated by one. Simply doesnot go together with capital injections.
The way they are doing it likely will be flexible it depends on things like individual articles of association. Even when Spain's legislation is changed so it can be forced upon them.
Doubt if overseeing by the ECB will be in place by the end of this year. Where do they get the people from. They also want to place 'systemic' part partly in Brussels. Which is pure stupidity imho. If it is very likely very difficult to get proper staff you:
- a) donot put them in 2 or 3 (Ffurt, Brussels and London) places, but in 1 and
- b) Brussels simply doesnot have people to do that kind of work so it is both an illogical choice plus a delay as people will have to move and that takes more time.

The whole stuff re boni btw is likely a Dutch demand. Hardly relevant economically. But it is a sort of Dutch political hobby (important locally).

Anonymous said...

A Ponzi scheme.

Pure and simple.

Rollo said...

Good idea, EU: take a nation with 24% unemployment, 55% youth unemployment, and drive them from debt into bankruptcy. That will help keep your big fat jobs in your idiotic conglomeration in Brussels.