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Thursday, July 26, 2012

Struggling to keep up to speed with the latest on Spain? Just read this...

There have been a couple more interesting developments about Spain today - the first one, at least in chronological order, being the publication of our new briefing. Speaking at the Global Investment Conference in London, ECB President Mario Draghi said,
To the extent that the size of these sovereign premia [i.e. the high borrowing costs of Spain, but also Italy] hamper the functioning of the monetary policy transmission channel, they come within our mandate...Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. Believe me, it will be enough.
Draghi's words were seen as a hint that the ECB could intervene in the secondary bond markets after a 19-week stop. This sent Spain's borrowing costs significantly down, with the interest rate on ten-year bonos falling slightly below 7% - which remains unsustainable in the long term, but is better than the mind-boggling 7.7% touched yesterday.

Quite extraordinary how the ECB President saying that the bank will continue to act within its mandate can bring about such 'optimism'. We would usually expect a denial/counter-comment from Germany or another more conservative eurozone member, but then maybe Draghi's remarks were well-timed to take advantage of the fact that Angela Merkel is on holiday...

On the Spanish regions' front, the government of Castilla-La Mancha - headed by Dolores de Cospedal, Secretary General of Rajoy's Partido Popular - refused to rule out seeking a bailout from the Spanish government, although it stressed that it doesn't need one "urgently". Meanwhile, Catalonia's Economy Minister, Andreu Mas-Colell has made clear that his region won't accept any "political" conditions the central government may try to attach to the loan Catalonia has decided to request.

His counterpart from Comunidad Valenciana, Máximo Buch, predicted that the Spanish government could consider boosting its €18 billion Autonomic Liquidity Fund (FLA, the rescue fund for Spanish regions) later this year, once all the Spanish regions in need of a bailout have shown their hand. Interestingly, Buch also suggested that several "shirking" regions will eventually follow Comunidad Valenciana's example and request a loan, sooner or later.

On a slightly separate note, Bankia's former chief Rodrigo Rato - who also served as Spanish Economy Minister and IMF Managing Director - has been heard by Spanish MPs today, and said a couple of interesting things. First off, he claimed that the Bank of Spain "ordered" him to go ahead with the merger of Caja Madrid and Bancaja, despite it being quite clear that the two cajas held a worrying combined total of doubtful real estate assets. For those unfamiliar with the story, Caja Madrid and Bancaja are two of the seven Spanish savings banks that form part of Bankia, which is effectively a conglomerate. Together, the two form almost 90% of Bankia. 

Rato (in the picture) also told MPs that, in May, he submitted a restructuring plan for Bankia to the Spanish Economy Ministry, but was ignored. Rato's plan involved a loan of 'only' €6 billion from the Spanish government - i.e. four times cheaper than the almost €24 billion Bankia is now in line to receive.
Although this is only Rato's version of how things went, this is pretty strong stuff - considering that Bankia is essentially where the whole story of the Spanish bank bailout started...   

As usual, you can follow the latest development in the eurozone crisis on our Twitter feed, @OpenEurope


Rik said...

On your note on Spain.
Imho you still got 2 major issues not clear.

1. Primary and secundary market. A loan only deals with the primary market (new issues).
Do nothing on the secundary market will most likely mean that yields get to 10% or even more on existing loans.
This has a lot of consequences.
a)it will be hard to turn back is one;
b)it will come back via the banks (see under 2).

a) Will most likely assure that after say 12 months (your example) there is a complete mismatch between the 2 markets. With the forecasts for Spain and the recession it simply means it will not work as the whole circus will start from scratch. Who will buy new bonds at 6% when secundary he can buy them for 10% or so?
So if you plan this you either have to:
-follow up (with a new rescue), for which there is likely no capacity (until Spain is sound again (after 2015 at best)); or
-start a parallel prgramm (possibly via the ECB) for the secundary market. However this involves huge amounts which are not there (ESM) or very unlikely to made available (ECB) for 3-4 years or maybe even more.

2. If secundary is not tackled we likely see 10+% yields, see what happened with Ireland. 100 Bns are on the BS of (Spanish) banks. Likely they will have make a reserve for that or at best will be dumped by the market (as at the end of the day not the bookvalue is deciding especially not when there are clearly huge losses not taken yet). Plus likely extra collateral for repos.
So the problem will most likely come back via the banking sector. Which is politically in the north even more difficult to save.

Therefor imho the only realistic option is directly a PSI (only on the duration, to avoid loss taking with the banks as much as possibible).
Avoid further cash out flow and therefor roll over issues of new debt.
Plus limit the capacity required.

Open Europe blog team said...

Thanks for the comments as always Rik.

We do agree that there will be problems between the primary market and secondary market mismatch and do try to touch on these in the briefing.

Firstly, we note the stigma associated with any full bailout programme or primary market purchases (PMP) which would make it nearly impossible for Spain to return to the market in the near future. Hence we suggest that neither a full bailout nor PMP will take place, because they would lock Spain out of the market which would do more harm than good (noted in footnote 22 on p.10).

Secondly, our example scenario is not something which we directly endorse but simply something we believe will appeal to eurozone leaders. The idea was to shed some light on the structure of a potential bailout given the known approach eurozone leaders take.The idea with the precautionary loan is that Spain does retain some market access even during the programme. Also the impact of the LTRO should not be completely discounted. Although it may be mixed it is likely that secondary market yields will come down, especially if the maturity is lengthened, rates cut and collateral rules loosened. This may soothe the pressure on yields, at least for a while.

Again as the briefing notes this is ultimately just a way for leaders to buy some time, with the aim of completing the banking union (or something along those lines).

Rik said...

1. My excuses, I mistook the summary on the homepage as the report. My mistake.
I see that we are pretty close in our views.
2. Just the angle to look at it was slightly different.
3. Basically now for instance I see no other no temporary solution as a PSI one. Other ones are at best temporary or bear the risk of getting a no from a parliament or a court. Simply too risky.
Easy bet economically.
4. Politically different likely Spain is going for the least short term pain (if possible).
One of their main problems very weak management. You simply donot see this or the earlier government getting things in order. Berlusconi stuff only less flamboyant, simply a big liability for the country.

Rik said...

Btw fully agree on your summary re the LTRO. It looks simply politically still a possibility.

However I am still afraid that the market will judge it very negatively (after they would have properly analysed it which usually takes a few days till a week).
1. It simply looks too much at this stage and for Spain as a desperate measure. Seen the state of the Spanish bankingsector.
If they move to these kind of measures it is an indication that the end is near. Which will likely give rise to all sorts of negative market reaction.
2. Same as with the yields. The problem comes back via the backdoor. Banks get further overexposed to sov debt.
For banks that are already seen more as an option than as a normal investment, it might work. But for those with a chance of survival it makes things worse.
Although it likely indicates well which banks are doubling down (and are better to be closed and the ones that still have prospects. Probably better than all those reports.
Makes betting on it easy. Put options (no short bans)long term relatively low exercise price. These (considerably) more than doubled in value since the last LTRO. These things can kill you.

gutscheine zum ausdrucken said...

sehr guter Beitrag