Spanish banks' bad loans look set to weigh on the economy for some time

The Bank of Spain released its latest data on the level of bad loans held by Spanish banks today. For the first time since January 2013, the value of bad loans has dropped - falling from €195.2bn in Feb to €192.8bn in March. However, it has stayed roughly constant as a percentage of total loans (13.4%).

Symbolically, even a small drop in the headline value of bad loans may be seen as important, especially given that previous declines were down to the transfer of assets to the Spanish bad bank (SAREB), rather than any change in circumstances of the loans. If this is discounted, the value of bad loans has simply continued to rise.

That said, as the graph highlights, these loans remain at very high levels and well above the loss provisions held by banks. This continues to tell us that:

• Spanish banks will continue to deleverage for some time to come. This puts a dampener on any hopes that they will show any rapid increase in willingness to lend and take on more risk to help fuel any form of Spanish recovery. This thereby increases the risk that any recovery will be ‘creditless’, and therefore more likely to be limited and temporary.

• This data is quite timely, as it also highlights the obstacles which the ECB is going up against in these countries when it comes to encouraging banks to begin lending again, particularly to small and medium-sized enterprises (SMEs). With their balance sheets still weighed down by these loans, it seems likely that banks will continue to be reticent to take on significant new lending, even if the ECB does offer them cheaper long-term loans.

• Given that many of these loans still relate to the real estate and construction sector, they will continue to weigh on prices in these markets. This suggests prices could fall further (although this will vary significantly based on location and regional markets), while the political hot topic of evictions could return to the fore again in the future.

Some ratings still matter in the eurozone

A general view seems to have come to pass (and not without good reason), that ratings actions in the eurozone have much less significance these days. This is mostly because the ratings agencies tend to 'lag' the market – meaning that a downgrade only comes once everyone already knows a specific country is struggling. The main outcome is usually a bad-tempered back-and-forth between governments and the agency in question, and then another call for EU regulation of rating agencies.

However, sometimes a rating change comes along that could have some material impact. In this case, it comes from a lesser known agency – Dominion Bond Rating Service (DBRS). In an interview with Spanish daily Expansión this morning, their Head of Sovereign ratings Fergus McCormick warned that Spain’s rating remains under pressure and that it is too early to tell if the crisis has bottomed out (as many in the Spanish government have suggested might be the case). DBRS' latest report on Spain, from March this year, also struck a more cautious tone.

This is interesting because, as Reuters pointed out in July, DBRS is the last rating agency to give Spain (and Italy for that matter) an A rating.

As the article also explained, this could cause problems for Spanish banks for the following reasons:

• They hold a large amount of Spanish government bonds as collateral for their borrowing from the ECB;
• Under ECB rules, the ECB judges collateral based on the highest single rating from four eligible agencies (S&P, Moody’s, Fitch and DBRS);
• The value of these bonds is subject to a haircut – for example a highly rated 10yr+ government bond would be subject to a 5% haircut, meaning a bank could borrow up to 95% of the bond's value under the ECB’s liquidity operations (see here for the full ECB collateral haircuts);
• However, once the rating falls, the haircut to such a bond jumps to 13%. This means banks using such bonds as collateral would have to reduce the amount they borrow from the ECB or produce more collateral to cover their current level of lending.

As of July 2013, Spanish banks were borrowing a combined total of €252 billion from the ECB, although this is well down from a peak of €411 billion in August 2012. This suggests that Spanish banks should have plenty of surplus collateral to fill any hole that opens - the muted market reaction so far also suggests as much. That said, the banks are currently de-leveraging significantly (selling off assets to reduce their balance sheets) and running a tight line in terms of balancing the books and trying to keep costs as low as possible. A hit such as the one described above is likely to be far from welcome.

Spanish regions: We hate to say 'We told you so', but...

In July, we published a briefing looking at the potential impact of regional debt problems on the Spanish economy. In particular, we noted that Spanish regions were expected to make swingeing cuts to meet the overly ambitious regional deficit target of 1.5% of GDP by the end of the year. Based on the size of cuts each region had agreed on with the Spanish government, we drew the 'traffic light' table below:

Three months later, it's time for an update. Following today's bailout requests from the Balearic Islands and Asturias, eight of 17 Spanish regions have decided to tap the €18 billion bailout fund set up by the Spanish government. And guess what? Four of them (Castilla-La Mancha, Comunidad Valenciana, Murcia and the Balearic Islands) are in the 'red' area of our table - i.e. among the regions that, according to us, had agreed to unattainable deficit reduction targets for this year. Catalonia, Asturias and Andalusia - top three in the 'amber' area - have also sought help from Madrid. To date, Canary Islands are the only surprise, as they have requested a bailout despite having to make the smallest deficit adjustment of all Spanish regions.

With only less than half of regions covered (although, of course, not all of them will need financial assistance), the Spanish government's bailout fund for regions (which totals €18 billion) has almost run out of money. Here is what each region has requested:

Catalonia: €5.4 billion
Andalusia: €4.9 billion
Comunidad Valenciana: €3.5-4.5 billion 
Castilla-La Mancha: €848 million
Murcia: €641 million
Canary Islands: €757 million
Balearic Islands: €355 million
Asturias: €262 million

TOTAL: €16.7-17.7 billion

So, if all regions obtained the entire amount they have asked for, there would be almost no money left in the pot - and two more regions in the 'red' area which may well need assistance (the case of Galicia is slightly different, as we explained in our briefing). This is why the Spanish government is trying to hold off on at least part of the loans. It has, for example, agreed to lend Andalusia only €2.1 billion, and €2.5 billion to Comunidad Valenciana - for the moment. However, regional governments will presumably push to get all the money they asked for - which in turn increases the likelihood that the bailout fund will need a top up.

We remain of the view that regional debt problems will not 'make or break' Spain financially, although depending on how the payments are handled they may increase Spain's deficit - as will the fact that the regions are still likely to miss their targets for this year. In any case, though, in the eyes of Spain's eurozone partners and the European Commission, every additional region tapping the bailout fund adds to the impression that the Spanish government is simply not capable of keeping regional spending under control. For once, we agree with the EU/IMF/ECB Troika on something.

Spanish deficit: The saga continues

Keeping count of how many times Spain's deficit targets and forecasts have been revised has become a challenging exercise. Following the publication of its draft budget for 2013, the Spanish government has admitted that Spanish deficit at the end of this year will be as high as 7.4% of GDP - with the EU-mandated target fixed at 6.3% of GDP - once the potential losses on the government's recent cash injections in the banking sector are taken into account.

However, pending official confirmation from the EU's statistics body, Eurostat, it looks like aid to banks will not be counted in the Excessive Deficit Procedure (EDP) currently open against Spain. Speaking after his meeting with Spanish Prime Minister Mariano Rajoy yesterday, EU Economic and Monetary Affairs Commissioner Olli Rehn suggested,

It can be expected that this kind of element of increase in the fiscal deficit related to bank capitalisation will be treated as a one-off and will not affect the structural deficit.  

We would not be too sure that this settles the question, though. First of all, the EDP covers more than just the structural deficit while other one off impacts (such as Portugal's transfers from its pension funds) have counted towards reducing the deficit. Secondly, it will be interesting to see how Germany, Finland and others will react - given that, in practice, Spain has just said that it will fail to meet its deficit target again.

In the meantime, as we pointed out on this blog last week, the time for big decisions is approaching for Rajoy. The results of the stress tests have been published, and the draft budget for 2013 has been unveiled. In particular, both the European Commission and Spanish Economy Minister Luis de Guindos have stressed that the measures planned by Madrid for next year go "beyond" the recommendations Spain has been made under the new 'European Semester' - potentially paving the way for an EFSF/ECB bond-buying request without unexpected additional conditions attached to it.

Unsurprisingly, rumours of an imminent request have kicked off. According to a senior European source quoted by Reuters,

The Spanish were a bit hesitant but now they are ready to request aid.

With the next meeting of eurozone finance ministers taking place on Monday, this weekend looked perfect for Madrid to apply for an EFSF/ECB bond-buying programme. However, Rajoy reportedly told a meeting of regional Presidents from his party that he would not make the request this weekend. During a press conference less than an hour ago, he also replied with a curt 'No' to a journalist asking whether the request was "imminent."

The domestic political reasons for a delay in the decision (key regional elections in Basque Country, Galicia and Catalonia over the next two months, plus the obsession with avoiding humiliación) are well-known. Apparently, Germany is also standing in the way. Sources have suggested that the German government is keen to "bundle" Spain, Cyprus and Greece into a single dossier, rather than submitting individual aid requests to the Bundestag for approval.

Beggars cannot be choosers, and Rajoy cannot simply ignore Germany's reservations. Luckily for him, they could even turn out to be convenient on the domestic front. As in previous instances, though, the markets will likely play a big role in the timing of any bailout: a sharp surge in Spain's borrowing costs could certainly precipitate a request. Should this happen, Rajoy would find plenty of occasions to present a formal request for aid - the next one potentially being the EU summit on 18-19 October...  
 

Some preliminary thoughts on the stress tests for Spanish banks: lots of optimistic assumptions...

Here is the full report (and the bank-by-bank results) from the latest Spanish bank stress test exercise. Below we provide the key points and our initial thoughts on them.

The tests put the total capital needs of Spanish banks at €59.3bn, but Spanish Deputy Finance Minister Fernando Jiménez Latorre (in the picture) just told journalists during the press conference that, assuming that Spanish banks manage to raise part of the money from other sources, the Spanish government could ask the EFSF for "around €40bn" (as we anticipated here).

Key points: 

• 14 banks assessed, 7 found to be well capitalised, 7 found to need capital injection. Total needs put at €59.3bn. This falls to €53.75bn when the mergers under way and the tax effects are considered;

• €24.7bn of the total amount is earmarked for Bankia alone, with a further €10.8bn for CatalunyaCaixa and €7.2bn for NovaGalicia;

• The adverse economic scenario assessed was: 6.5% cumulative GDP drop, unemployment reaching 27.2% and additional drops in house and land price indices of 25% and 60% respectively, for the three-year period from 2012 to 2014;

• Cumulative credit losses for the in-scope domestic back book of lending assets are approximately €270bn for the adverse (stress) scenario, of which €265bn correspond to the existing book. This compares with cumulative credit losses amounting to approximately €183bn under the base scenario.

Open Europe take: 

• The base case scenario seems overly optimistic, the adverse scenario looks more realistic - although we expect a fall in house prices of around 35% rather than the 25% assumed. The prediction that unemployment will peak at 27.2% also seems optimistic given that there is plenty more austerity and internal devaluation to come while the structural labour market reforms are yet to take effect.

• Oliver Wyman's report strongly assumes that all the previous capital buffers and loan loss provisions have been well implemented with suitable quality of assets. However, this is far from assured;

• The level of non-performing mortgage loans seems incredibly low at 3.3% currently with losses only predicted to rise to 4.1% under the adverse scenario. This number could well be distorted by forbearance (delaying foreclosing on loans likely to default to avoid taking losses) by struggling banks. It will also massively increase if unemployment and economic growth turn out to be worse than predicted;

• The levels of recovery on foreclosed assets seem a bit too positive (admittedly a wide range of between 37% - 79% losses depending on type of asset) given the continuing oversupply in the real estate market in Spain. Until the market has fully adjusted, the huge mismatch between supply and demand is likely to keep resale value on foreclosed assets incredibly low;

• These tests do look to be more intense than the previous ones but ultimately the optimistic assumptions do instantly raise questions over their credibility. The structure of the bailout request is also unlikely to enamour investors, who like to see grand gestures, however, it always positive that taxpayer participation may be limited. 

 

Creative Bailout Thinking, Spanish Style

One should give some credit to the Spanish government for its determination in trying to make bailouts look like something else. Today's El País reports that Spain is planning to request that the unused money from the €100 billion bank bailout package agreed with the Eurogroup a couple of months ago be used to buy Spanish bonds on the primary market.

This, in turn, should be enough - or at least this is what people in Madrid hope - to convince the ECB to start buying Spanish debt on the secondary market. According to the paper, the results of the independent audit of Spain's banking sector - whose publication has been postponed to 28 September - are expected to confirm that Spanish banks need a total capital injection of no more than €60 billion.

Therefore, the Spanish government is confident that, assuming that banks will be able to raise at least part of the money from alternative sources, it will only have to use less than half of the rescue package for bank recapitalisation - which would leave some €55-60 billion available. In other words, Spain sees the possibility of obtaining ECB support without having to apply for a separate EFSF bond-buying programme - i.e. without having to ask for more money.

Good effort, but too many 'ifs' remain. First of all, the results of the audit should not be taken for granted. As we recently argued, the real capital needs of Spanish banks may turn out to be higher than the €60 billion Mariano Rajoy and his cabinet are currently betting on. Furthermore, even if the €60 billion figure were confirmed, it is fair to assume that Spanish banks may face unreasonable borrowing costs on the markets - compared to what is on offer through the bailout funds. Therefore, they may find it much easier to just ask the government for cash.

Secondly, according to the draft agreement that we published on our blog (see here), Spain does indeed have the right to request that part of the €100 billion be used for purposes other than bank recapitalisation. However, in order for this to happen, the Memorandum of Understanding will have to at least be substantially revised and a whole new one may need to be created. Now, Rajoy is assuming that no new conditions would be imposed if Spain were to apply for a bond-buying programme - and the European Commission appears to share his view. However, it is far from clear whether this will actually be the case (see the recent comments from Eurogroup chairman Jean-Claude Juncker and Dutch Finance Minister Jan Kees de Jager).      

Finally, it remains to be seen whether the ECB or Germany will agree to such a plan, especially since it further muddies the water between bailouts and conditionality - not exactly clear cut as it is under the ECB's bond-buying programme.

Rajoy may have to make a decision fairly soon. The markets do not like prolonged uncertainty, and the first signs of impatience are already visible. Whatever the solution, it will need political approval from all the parties involved, as much as creatively adjusting current plans may seem, there is no circumventing this fact. 

So Bankia is still a viable bank...?

Spain announced its plans for cleaning up its banking sector earlier. With the full legislation only just released, we are still looking through it and will bring you the pertinent points in due course. But there was also another interesting development with regards to the ailing lender BFA-Bankia.

The Spanish government announced this afternoon that BFA-Bankia will receive an "immediate capital injection" from Spain's bank restructuring fund (FROB). Nonetheless, Spain has decided not to request the early disbursement of part of its €100bn bank bailout package. This is despite the fact that €30bn had been set aside for emergencies, as the Eurogroup noted in a statement issued earlier this afternoon. The funds will therefore be paid out in advance by the FROB and will be eventually incorporated into the Spanish bank bailout when it is fully dispersed.

This raises a couple of interesting questions. Firstly, why is Spain so keen to avoid tapping the €30bn kept in reserve? The money is there for just such an occasion, and in fact it was fairly obvious that this exact situation would arise. What's more, the money will be folded into the bailout anyway. Therefore, we can only imagine that the Spanish government is keen to avoid some kind of negative stigma – although this seems slightly strange since the bailout is already confirmed. It is worth keeping in mind the constraints of the EFSF vs. ESM funding (which we covered here), so it is possible that Spain and the eurozone have decided they want to wait until the ESM is fully operational before tapping the funds.

Reading the press release, it is also clear that this is a restructuring of BFA-Bankia, meaning it is still viewed as a viable bank. This seems almost outrageous for a few reasons:

• Bad loans held by Bankia jumped by 44% (to 11%) in the past six months alone
• The group just posted a loss of €4.45bn, compared to a slight profit a year ago
• In the past six months the banking group has lost a staggering €37.6bn in client funds, a massive 28% fall. 

It’s been clear to most for some time that Bankia is no longer viable. The latest government plans for dealing with the banking sector provide for an “orderly resolution” of unviable banks and a template for splitting up its assets and winding down the institution. It is not entirely clear why this is not being applied here, although protecting retail investors could be part of it. In the end, though, investing further public funds into a failing institution will do everyone more harm than good.

Who said it?

A quick-fire Friday afternoon quiz for our readers. Who said the following in February 2011?

"As a Spaniard, I don't like being told what I have to do from outside."

Well, it was Spain's then opposition leader Mariano Rajoy, who was elected as Spanish Prime Minister a few months later.

Will Rajoy have to eat his words...?

Could this 'concerted action' fly?

Today's edition of French daily Le Monde - which, unlike a large majority of newspapers, is delivered to newsagents at noon - features an interesting story.

According to the paper, the ECB and eurozone governments have intensified talks about the possibility of launching a 'concerted action' to keep Spain's (but also Italy's) borrowing costs at reasonable levels. The recipe is quite simple. The first step would be the eurozone's bailout funds - the temporary EFSF and, as soon as it is up and running, the permanent ESM - buying Spanish/Italian bonds on the so-called primary markets, where national treasuries try to sell newly-issued public debt.

The ECB would follow suit, and would resume its bond purchases on the secondary market - after keeping quiet for almost five months. This would tackle the short-term emergency. The second step, according to Le Monde, could be giving the ESM a banking licence, so that it can have unlimited access to ECB liquidity.

In order for this 'concerted action' to kick off, though, Spain has to make a formal request for an EFSF bond-buying programme. According to the paper, this could be overcome by offering Mariano Rajoy's government 'softer' conditions.

Sorry for once again being the bearers of bad news, but this is not as easy as it sounds. First of all, the Spanish government remains very reluctant to request anything the markets may see as a fully-fledged bailout. Just think of how consistently Rajoy and his ministers have avoided using the word rescate (bailout in Spanish) when referring to the €100bn rescue package for the Spanish banking sector. Secondly, giving Spain 'softer' conditions could potentially open Pandora's box and prompt Greece, Ireland and Portugal to ask for the same treatment.

On top of this, there are also other problems with this 'concerted action', which Le Monde seems to overlook. Should the EFSF start buying bonds, this would not necessarily mean that the German Bundesbank would suddenly change its mind and support massive bond market interventions by the ECB. See, for example, the Bundesbank's reply to Mario Draghi's latest remarks. Unusually late by German standards, but no less categorical in making clear that the bank "hasn't changed its opinion" (i.e. its opposition) to such interventions.

Now, unanimity in the ECB's Governing Council is not needed with regard to bond purchases. But it would be politically very difficult to outvote the Bundesbank over and over again - not to mention that the Dutch and the Finns are likely to be sympathetic to the German concerns. On a more technical note, bond purchases on the primary markets can be addictive, similar to what has happened with ECB liquidity to eurozone banks. In other words, it could be quite difficult for, say, Spain to finance itself in a normal fashion after EFSF/ESM purchases are phased out. As we have stressed before, no-one wants to see a situation where the eurozone faces zombie states similar to the peripheral zombie banks now reliant on ECB liquidity.

All very speculative at the moment (Le Monde does not actually mention any specific sources), but it's clear that things are moving quickly. Keep following us on Twitter @OpenEurope if you want to keep up to speed!   

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

Regional debt, national problem: Is Spain heading for a full bailout?

As Spain seems to have wiped anyone else away from eurozone crisis-related headlines, we have published a new briefing looking at how the Spanish crisis could evolve in the near future – focusing our attention on the role of the regions and potential bailout scenarios.

Forgive us a bit of self-praise, but we have repeatedly stressed the risks involved in Madrid being unable to rein in spending at the regional level (see here and here, for instance). In our new briefing, we argue that, at the end of the day, the regions alone will not make or break Spain financially (more likely, it will be the banking sector, a risk which we also highlighted at length). In fact, if they continue to rely on the central government for funding, this could increase Spain's financing needs for this year by an extra €20bn - not pocket change, but still around only 2% of the country's GDP.

However, further damages to the credibility of Mariano Rajoy's government vis-à-vis its eurozone partners would be inevitable. Furthermore, we believe regional problems combined with banking sector issues and other pressures could ultimately push Spain into a fully-fledged bailout.

But would there be enough money in the pot if this happens? 

Probably not. In fact, we estimate that taking Spain off the sovereign debt markets for three years in a Greece-style bailout would cost between €450 billion and €650 billion. This is both economically and politically impossible at the moment, given that the lending power of the eurozone's two bailout funds, the EFSF and the ESM, will only total €345 billion this year, and will rise to €500 billion in mid-2014.

Therefore, we suggest that the most likely scenario is a combination of measures, involving a precautionary loan of around €155 billion combined with a new bout of ECB liquidity. However, even that could, at best, only buy Spain six months to a year.

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.

Lack of clarity plagues the Spanish government

Once again the lack of clarity coming out of the Spanish government has resulted in it getting a bashing by the press over the past few days, both in Spain and across Europe. The source this time was the press conference on Friday announcing the new €65bn in austerity measures – unfortunately at the time the government seemed unwilling to shed any light on exactly how and where these cuts will be made.

Fortunately, the Spanish press has published a paper circulated to foreign investors by the Spanish government, which fills in some questions regards the structure of the new fiscal consolidation programme (see here for the full document).

Despite providing some info, the doc remains fairly vague and raises plenty of questions, see our thoughts on the most interest points below:

·         The document lays out €56.44bn in savings. However, it is not clear where the remaining €8.5bn or so in savings - necessary to get to the total €65bn announced - will come from. El Mundo suggests that the additional money could come from changes to environmental and energy taxation; 

·         Around €9.22bn of consolidation looks set to come from savings due to increased efficiency in public services and efforts to reduce the public sector wage bill. There is little additional detail on how either of these will be achieved. We are particularly cautious over the ‘efficiency’ gains – there is no doubt that some are there to be made, but placing such a large amount of importance on such an uncertain area, without having conducted any discernible research on where savings could be made in this respect, seems overly optimistic at best;

·         A large amount of the savings is also meant to come from tax increases. This is despite the likes of the IMF and OECD often vocally supporting a more even split between tax increases and expenditure cuts, probably with more of the burden falling on the latter;

·         Furthermore, the rise in VAT is expected to do much of the legwork in terms of raising funds – around €22bn in fact. This in spite of Spanish Prime Minister Mariano Rajoy's previous pledges not to increase VAT. The potentially regressive nature of VAT is well known and with unemployment at record levels and large amounts of the population struggling to manage their finances, the move may not be well received and could be incredibly harmful. Increasing a tax on transactions could also dent consumer activity at a time when it needs to be boosted;

·         Much of the burden of implementation, particularly on the tax front, will fall on the autonomous regions. The disputes between the regions and the central government is well documented and could potentially lead to implementation problems, particularly since many of them may be more inclined to drag their feet on fiscal consolidation measures which could dent economic activity in their region.

Overall then, this is the most detail we have seen on the planned cuts but yet falls woefully short of providing a clear picture on how exactly the Spanish government will go about making the necessary savings within the necessary time frame. Given the huge questions surrounding  the Spanish bailout, many of which are out of the government’s hands, it’s more important than ever for the Spanish government to bring clarity to the issues which they can control.

Spain: A busy week draws to an end

Dutch Finance Minister Jan Kees de Jager yesterday debated the Spanish bank bailout with MPs. Among other background documents, the Dutch finance ministry published on its website a 'confidential' briefing prepared by officials at the eurozone's temporary bailout fund, the EFSF. The document reveals a couple of interesting additional details about how and when the money will be paid out, which were not included in the draft Memorandum of Understanding leaked to the Spanish press earlier this week.

As announced by Eurogroup chairman Jean-Claude Juncker after Monday's meeting of eurozone finance ministers, the first tranche - worth €30 billion - will be disbursed before the end of July. However, the EFSF briefing makes clear that this is not a fully-fledged payout, since this money will be "kept in reserve by the EFSF in order to allow rapid disbursements in case of urgent needs arising in the Spanish banking sector."

The first actual disbursement would only happen in November. By then, the Spanish government will have established how much money the banking sector needs, after the conclusion of bank-by-bank stress tests. The estimated amount of this disbursement is €45 billion (i.e. the initial €30 billion plus a further €15 billion).

Two more payouts - worth €15 billion each - would then take place in December 2012 and June 2013 respectively. All the disbursements are expected to be provided in the form of EFSF bonds.

The rest of the aid package (up to €25 billion) would be used to complement the toxic assets that bailed out Spanish banks will transfer to an Asset Management Company - a nice way to call a 'bad bank'   

The EFSF has also released a new FAQ on the Spanish bailout and the two documents combined raise some interesting questions. The first if over how the loans will be provided - whether in cash directly or in EFSF bonds. The docs suggest the latter for the most part, although it is worth noting that the third disbursement (€15bn) may be used to purchase 'convertible shares' of banks which had aimed to raise money privately, but are struggling - this means that direct cash loans will be needed.

The second question follows on from this. As has been noted elsewhere, the rate at which the loans will be provided is ambiguous. The FAQ specifies that it will be the rate at which the EFSF borrows on the market to raise the money for the bailout, plus a small premium to cover costs. A couple of points to note here:

• First, that this is much lower than the original premiums offered to Greece, Ireland and Portugal - although following the cuts to these rates the difference is not huge;
• Second, if much of the bailout will be issued in the form of EFSF bonds, meaning no market issuance, how will the interest rate be calculated? This remains unanswered, although we'd hazard a guess that the rate may be based off similar issues by the EFSF or an implied market rate.

On top of this the documents also fail to shed much light on the issue of ultimate liability. The state will remain liable for the loans while they come from the EFSF. However, once they are transferred to the ESM (and therefore count as loans directly to banks) it is not clear if they will still be liable. Germany has made it clear it wants to maintain the sovereign backstop, however, the peripheral countries and the Commission seem less keen.

It's been a week of interesting developments with these documents and the draft Memorandum of Understanding also being released. Unfortunately, the overall picture remains hazy. With details and the package as a whole expected to be finalised at the next meeting of eurozone finance ministers on 20 July, there remains plenty of questions to answer.

Update 15/07/12:
Clearing up a point above, as the table shows and as is mentioned in the comments, the €45bn disbursement will carry over €20bn from the first disbursement (as opposed to the full €30bn as suggested above). The remaining €10bn from the first disbursement will be carried over but will continue to be held in reserve until the fourth disbursement.

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.

A summit plus for Greece?

Given that Greece lacked any real political presence at last week’s EU summit, discussions on the crisis in Athens were fairly minimal and it was largely overlooked during the ensuing press coverage.

However, Kathimerini has an interesting report today suggesting that Greece could attempt to get the cost of its bank recapitalisation removed from its sovereign debt levels – in the same way that Spain is hoping to do. This could well be seen by eurozone leaders as a way to quickly reduce Greece’s debt burden – although we don’t think it will change any of the fundamental problems which it faces.

A large amount of the second Greek bailout – around €50bn – is actually going to Greek banks to help them absorb the large losses they faced from the Greek debt restructuring. With Greek debt currently standing at around €327bn or 160% of GDP, removing €50bn from this figure could provide a significant boost to Greek debt sustainability – bringing the figure down to 136% of GDP.

There are, however, a few important caveats to note here:

• Firstly, 136% is still an unsustainable debt level, even with this reduction the Greek debt burden is still huge and the need and demands for austerity are not likely to waiver . 
• Secondly, and possibly more importantly, is that this will only be an adjustment on paper for all intents and purposes. Greek banks are dead on their feet, living off liquidity from the ECB and the Greek Central Bank. They will never be able to repay this money and it will still ultimately be underwritten by the Greek state. So, even if this debt is shifted off the official figures it will still be a burden of the state – in reality little will have changed. 
• Lastly, this process will not happen anytime soon. The bailout funds cannot lend directly to banks until the ECB is in place as the eurozone’s financial supervisor, and as we have noted, this will be at the earliest the start of next year. This also happens to be the period by which we have suggested that leaving the euro may become more attractive from a Greek perspective. 

An interesting development which seems to have mostly slipped under the radar then. We wouldn’t be surprised to see the eurozone and Greek leaders take advantage of this opportunity to gain a large reduction in the superficial figures on Greek debt – it would make for an effective headline figure and would likely buy them some more time in terms of making Greek debt look sustainable in their and the IMF's models. Ultimately, though, it would only be window dressing, further shifting of funds around to try to make the situation seem better than it is. In the end, as we have always said, there are no easy answers to the Greek or eurozone crisis.

No, the euro hasn't been saved yet

On the Telegraph blog, we argue:

Judging from some media reports across Europe – and some positive market reactions, the eurozone crisis has just been solved. Italy and Spain scored a massive victory over Germany. Angela Merkel has caved in. Berlin has blinked.

Hardly. Though Merkel took a bit of a beating and some unexpected progress (the term is used loosely) was made, the primary achievement was to shift yet more of the burden from banks and governments in the south to taxpayers in the north, via the eurozone bailout funds. Nothing fundamental has been solved. Here’s why:

Recapitalisation of Spanish banks still faces hurdles: In future, the eurozone’s permanent bailout fund, the ESM, will be able to directly recapitalise banks in the eurozone, without first passing the cash through national governments. This could help Spain, as the loans won’t count towards Spanish government debt. But no more money is on the table, and the changes will only happen when the ECB has shouldered the role as supervisor for banks in the eurozone and ESM rules are reworked. Judging on past record, this can take time. Merkel has also indicated that the changes to the ESM will have to be approved by the Bundestag, which won’t be comfortable given the already strong reaction from backbench MPs.

The bailout funds are still not big enough to stand behind Spain and Italy: The two bailout funds – the EFSF and ESM – could be allowed to buy government bonds with only existing EU targets in place, ie. no Greece-style monitoring programme. To consider this a game-changing move is an illusion. First, it is merely activating a previous EU decision – so Germany has agreed to no new instrument. Second, unlike the ECB, the EFSF and ESM don’t actually have the funds to backstop Italy and Spain – their bond buying is likely to be tested by the markets and could prove counterproductive. Perversely, if conditionality is indeed relaxed it would provide a pretty strong incentives for other countries – such as Italy – to tap the bailout fund. Hardly desirable.

EU loans will remain senior: The conclusions suggest that any loans made by the EFSF and then transferred to the ESM (i.e. the Spanish bailout) will not be “senior”, ie taxpayers and financial institutions will take losses simultaneously if a debtor country fails to pay back the cash. In reality though, as the restructuring in Greece showed, official loans have always been treated as de facto senior. This is not necessarily a bad thing since it protects taxpayers, but it simply adds to the confusion and often only delays the pain.

Ireland will get easier terms on its bailout: This is significant for Ireland, and an effective admission that the EU might have been wrong to force the country to bail out its banks and carry the burden on its sovereign debt alone. How much can be done this far down the line is unclear, but the positive sentiment could help the Irish recovery.

The ECB as bank supervisor has merits – but comes with pitfalls: The aim seems now to have the ECB taking over the responsibility as chief bank supervisor in the eurozone by the end of the year, or at least an agreement to that effect. As I’ve noted before, the proposal comes with merits, but for better or worse, could be very significant for the UK if taking to its logical conclusion (resolution fund, deposit guarantee scheme, super-harmonised regulation), with the risk of fragmentation of the single market (as UK itself cannot take part). But this will take a lot of fiddling to sort out.

What’s clear is that Germany has not moved on debt pooling, including eurobonds. The German government firmly denied suggestions this morning that anything had been agreed on this front. But the summit deal has caused a lot of bad blood within Germany. Apparently, Italy and Spain threatened to veto the €120bn growth package proposed by Hollande if Merkel didn’t give way (incidentally, given that these two countries were meant to be the chief beneficiaries of the ‘growth’ package, its a sign of how seriously – or not – people take this proposal). The episode has left Germany seriously frustrated and with a feeling of an ever increasing weight on its shoulders.

Paradoxically, this may have the effect of hardening German resistance to debt pooling in the eurozone. Yet again, the focus shifts to German domestic politics.

Funding needs of Spanish banks could top €110 billion

We have this morning published a new briefing looking at the funding needs of Spanish banks and the Spanish state. Taking into account that Spanish house prices may drop another 35%, we estimate that the country's banking sector could need an immediate €110bn capital injection to withstand potential losses – an amount which is substantially higher than the recent official estimates provided by both the IMF and the two independent auditors hired by the Spanish government.

Our briefing coincides with the letter sent by Spanish Economy Minister Luis de Guindos to Eurogroup Chairman Jean-Claude Juncker, in which Spain officially requests a bank bailout. Unsurprisingly, the letter stops short of mentioning any specific amounts. The details will be nailed down ahead of the next meeting of eurozone finance ministers on 9 July.

Here's the letter in full, translated from Spanish: 

I have the honour to address you [Eurogroup Chairman Jean-Claude Juncker] on behalf of the Spanish government, to formally request financial assistance for the recapitalisation of Spanish financial entities which will require it.

This financial assistance falls within the framework of financial aid for the recapitalisation of financial institutions. The choice of the concrete instrument through which this aid will materialise, will take into account the different options that are currently available and others that might be decided in the future.

The Spanish government considers very positively the declaration made by Eurogroup ministers on 9 June, which expressed support for the determination of the Spanish authorities in restructuring [Spain’s] financial system and their intention to seek financial assistance for the recapitalisation of financial entities, of an amount sufficient to cover the capital needs plus an additional safety margin, up to a maximum of €100 billion.

The [Spanish] Orderly Bank Restructuring Fund (FROB), which will act on behalf of the Spanish government, will be the institution which will receive the funds and transfer them on to the financial institutions.

The Spanish authorities will offer all their support in the assessment of the eligibility criteria, the definition of the financial conditionality, the monitoring of the measures to be introduced and the definition of the financial aid deals, with the objective to finalise the Memorandum of Understanding before the 9 July so that it can be discussed at the next Eurogroup meeting.

In this regard, the two Independent audits of the Spanish financial sector, as well as the FSAP analysis carried out by the IMF, should be used as a starting point.

Do not adjust your television set, this is not a Spanish rescue (despite looking an awful lot like one...)

Well, that was the line that Spanish Economy Minister Luis de Guindos was spinning yesterday. Sorry Luis, this is essentially a Spanish rescue - external funding sources filling a gap which the state can't (check), monitoring of a large chunk of the economy (check), involvement of all the big international organisations (check - EU, IMF, ECB etc.), the list goes on.

Meanwhile, the oft absent Spanish Prime Minister Mariano Rajoy held a press conference today, declaring the package a 'victory' for the euro and stating that if it were not for the current government's reforms it would have been a full bailout package. If this is a victory (finally dealing with a glaring problem after four years) then we don't want to see a defeat, but at least Rajoy made a public appearance this time. That said, in the midst of the worst crisis his country has faced since the financial crisis hit, Rajoy is now jetting off Poland to watch Spain vs. Italy (a mouth watering prospect admittedly but his timing could take some work), while the likes of the Education Minister are heading to Roland Garros to watch Rafael Nadal - the Spanish government not quite in crisis mode then, we're not sure if that should inspire confidence or not...

In any case, as we predicted over two months ago, European assistance to help Spain deal with its banks is now official, so what does this rescue mean for Spain and the eurozone, below we outline some of the key points and our take:

The plan
Spain will access a loan from the EFSF/ESM (the eurozone bailout funds) which it will use to recapitalise its ailing banking sector. The money will be channelled through the FROB (the bank restructuring fund) but will still be a state liability (it will not go directly to the banks). However, unlike the other bailouts it will not come with fiscal conditions but only conditions for reforming the financial sector.

Open Europe take:
Firstly, the ESM will not be in place in time to provide the loan (the treaty is yet to be ratified by numerous countries and has faced many delays) so at least initially it will come from the EFSF. As others have pointed out, this is important because ESM loans are senior to other types of Spanish debt while EFSF loans are not. This may make things easier to start with (as it removes the threat of legal challenges based on clauses in other Spanish sovereign debt which could be triggered if it suddenly became junior), however, Finland has already raised concerns over its exposure and role in the rescue - an issue we tackle in more detail below.

The lack of additional fiscal conditions is fair given that Spain is already subject to a deficit reduction programme and that this is ultimately a financial sector problem. There are questions over conditionality and moral hazard though - we would like to see bank bondholders and shareholders sharing more of the burden (bail-ins) to ensure the necessary reforms take place. As things stand its hard to see how the banks will 'pay' for this capital, particularly given the Spanish regulators previous failures (during and after the property bubble).

De Guindos confirmed that the funds would be counted as Spanish debt, so Spanish debt to GDP could be about to jump by 10% in the near future and given its current path this could put Spain over 90% debt to GDP (the level beyond which sustainability becomes questionable) much sooner than had been anticipated. This will require adjustments in its reform programme and lead to increasing market pressure.
 
Size - is it enough?
This is the key question - the total amount has been put at "up to" €100bn. That is much higher than was suggested by the IMF assessment released on Friday night, which suggested €40bn.

Open Europe take:
It sounds like a big number, but upon closer inspection it may not stretch as far as many expect. Consider that Bankia requires €19bn, while three other very troubled cajas need around €30bn (Banco de Valecia, Novagalicia and Catalunya Caixa) meaning half the money could already be eaten up, leaving only €50bn for the rest of the huge banking sector.

This compares to around €140bn in doubtful loans, and a total €400bn exposure to the bust real estate and construction sector. Doubtful loans to this sector total around €80bn currently, but we expect house prices to fall by a further 35%, broadly meaning that the number of doubtful loans could easily double. On top of this we have further losses on mortgage loans as well as losses on other corporate debt and a decrease in the value of Spanish debt held by banks. So huge number of issues - putting a clear figure on it is difficult due to the difference between tier one capital and 'loss provisions' (tier two capital). But even if this €50bn is given in tier one capital and stretched to increase provisions its hard to see that it will be enough given the huge exposure to mortgages and the bust sectors, especially at a time when growth is falling further and unemployment continues to rise.

Finland and Ireland - flies in the ointment?
If the EFSF is used (which looks likely) the Finnish government is obliged to ask for 'collateral' as it did with Greece - the noises coming out of Finland suggest it will, especially given its objection to 'small' countries bailing out 'larger' ones. Ireland has also suggested that if Spain is able to avoid fiscal conditions on its bank bailout then it could request similar treatment (i.e. a loosening of 'austerity').

Open Europe take:
The Finland issue will get messy, as it did in Greece. It will add another complex layer to negotiations, while politically it will help the (True) Finns who are already launching a campaign against further bailouts. It could also lead to legal challenges - as we pointed out with Greece, it could trigger 'negative pledge' clauses on Spanish bonds given that they essentially become subordinated to Finland's claim on Spain. Not guaranteed, but a legal grey area which adds to the confusion.

As for Ireland, they have a fairly strong case here. Ultimately, their fiscal troubles stemmed from bailing out their banks, something Spain is now able to dodge thanks to external help. Ireland already feels that it is paying a huge price for protecting the European banking system - this will only add to this ill feeling. Given Ireland's perceived 'success' in Germany some flexibility may be forthcoming but we doubt enough to assuage Irish anger.

Impact on the UK?
The IMF will only play a 'monitoring' role, meaning the UK will not be liable for the money provided to Spain. However, given the links between the UK and Spanish banking systems it is imperative that the problems in the Spanish financial sector are finally dealt with - whether that will happen this time around is yet to be seen but given the points above it is not off to a great start.

Impact on the eurozone - Open Europe concluding remarks:
Markets responded positively to rumours of external aid for Spain on Friday afternoon, but, given the points above, a huge amount of uncertainty remains which will keep markets jittery and increase pressure on the eurozone. That is far from needed given the uncertainty surrounding the Greek elections. Given the ongoing assessment of the actual needs of Spanish banks the rescue will now enter a state of limbo as attention turns back to Greece, in the meantime Spain is likely to find it difficult to access the market (since this is broadly an admission it cannot raise any substantial funds itself).

Questions will also arise over the strength of the eurozone bailout funds - Spain guarantees around 12% of them, surely its guarantees are now worthless or would do more harm than good. Additionally, now that one of the larger countries has asked for support pressure will intensify on Italy (particularly with the falling support for the technocratic government and the slow pace of reform).

Spain races against time

Things are looking sticky in Spain.

Firstly, the Spanish government announced a bail out of Bankia to the tune of €19bn in addition to the €4.5bn already put in - and is currently looking at the least painful way of getting cash to the bank. The plan is still up in the air. Yesterday there was talk about swopping government bonds for shares in the bank (Bankia could then use the bonds as collateral to get more cash from the ECB). This made a lot of people nervous, not least the Germans, who already worry that the link between states and ECB funding, via banks, is getting a bit too strong. Today's talk has instead focused on issuing bonds from Spain's specific bank bailout fund, FROB, to raise the cash Bankia needs.

Secondly, Catalonia - Spain’s wealthiest region - has asked the central government for financial assistance to repay its €13bn debt; bad news for the central government's debt and deficit. Thirdly, the the spread between Spain and Germany’s ten-year bonds reached its highest level since the introduction of the euro, with Spanish ten year bonds currently at around 6.4%.

There are a huge number of issues on the table here, but these events highlight three things that we pointed to in our April 3 briefing on Spain:

• Despite Spanish PM Rajoy's remarks to the contrary, it looks increasingly as if Spain is slowly realising that it may not be able to afford to directly fund Bankia or other banks that run out of cash. And the numbers could well go up. This, in combination with talks and leaks over recent days that European money will be needed to backstop the Spanish banking system (Rajoy is very keen on more from the ECB), indicates that Spain is now moving ever closer to bank bailout via the EFSF.

• A huge battle looms over the finances and economic autonomy of Spanish regions, that remain a massive liability for the central government's attempt to cut its debt and deficits.

• Spain is racing against the clock. Naturally it will take time for the structural reforms that Spain is pursuing to have an impact - time that markets just won't give it at the moment.

Instead, it looks as though that time may soon have to be bought by eurozone taxpayers.