Spain
seeks the kiss of death
Spain
Seeks $125 Billion Bailout As Bank Crisis Worsens
Spain
asked euro region governments for a bailout worth as much as 100
billion euros ($125 billion) to rescue its banking system as the
country became the biggest euro economy so far to seek international
aid.
Spain's
Economy Minister Luis de Guindos speaks at a news conference in
Madrid today
10
June, 2012
“The
Spanish government declares its intention of seeking European
financing for the recapitalization of the Spanish banks that need
it,” Spanish Economy Minister Luis de Guindos told reporters in
Madrid today. A statement by euro region finance ministers said the
loan amount will “cover estimated capital requirements with an
additional safety margin.”
Just
seven months after winning a landslide victory, Prime Minister
Mariano Rajoy was forced to abandon his bid to recapitalize Spanish
banks without recourse to external help as a deepening recession
forced lenders to recognize spiraling losses. Today’s move means
Spain has a firewall in case the Greek election on June 17 unleashes
a fresh round of market turmoil.
De
Guindos said the terms of the rescue loan are “very favorable”
compared with market rates and the funds will be channelled through
Spain’s FROB bank fund. Banks getting aid will have to meet
conditions, he said. The International Monetary Fund will only have
an advisory role, he said.
The
eurogroup statement said that the formal request will come “shortly.”
An assessment will then be provided by the European Commission, which
will liaise with the European Central Bank, the European Banking
Authority and the IMF. There will also be a proposal for “the
necessary policy conditionality” that will accompany the
assistance.
Aid
Pressure
European
officials have failed to get their arms around a debt crisis that
started in Greece at the end of 2009 and has now claimed the euro
region’s fourth-largest economy. The bailout adds to the 386
billion euros ($480 billion) in pledges to Greece, Ireland and
Portugal that European governments and the IMF have made since 2010.
Spanish
officials faced increasing pressure to seek aid over the past week as
European leaders race to put measures in place should next week’s
Greek election increases the chances that the country will leave the
euro. European Central Bank Governing Council member Ewald Nowotny
said yesterday that any delay by in requesting aid would increase the
costs of a rescue.
“The
longer you wait with revamp measures, the more expensive it gets,”
Nowotny said.
Funding
Hole
Spanish
borrowing costs have jumped since March and last week rose close to
the euro-year high of 6.78 percent. The yield on the country’s
10-year bond has since slipped amid optimism that Rajoy would seek a
bailout and was at 6.17 percent yesterday.
The
Spanish government’s credibility was jolted by the funding hole
reported last month by Bankia group, the third- biggest Spanish
lender. The bank’s new managers went beyond the government’s
provisioning rules and asked for a 19 billion-euro bailout. Economy
Minister Luis de Guindos had said two weeks earlier that 15 billion
euros would be enough to meet the requirements of the second of two
banking decrees he has drafted this year.
Fitch
Ratings downgraded Spain to BBB, within two steps of non-investment
grade, on June 7 and said the cost to the state of shoring up banks
may amount to as much as 100 billion euros in the worst case,
compared with its previous estimate of 30 billion euros.
“The
Spanish problem was entirely avoidable,” said Thomas Mayer, an
economic adviser to Deutsche Bank AG in Frankfurt. “When Bankia got
into trouble and they had to inject another 19 billion, the market
thought, well, they don’t know what they are doing.”
Commentary from Zero Hedge
Spain IS Greece After All: Here Are The Main Outstanding Items Following The Spanish Bailout
After
two years of denials, we finally have the right answer: Spain IS
Greece. Only much bigger (it is also the US, although while the US
TARP was $700 billion or 5% of then GDP, the just announced Spanish
tarp is 10% of Spanish GDP, so technically Spain is 2x the US). So
now that the European bailout has moved from Greece, Ireland and
Portugal on to the big one, Spain, here are the key outstanding
questions.
1.
Where will the money come from?
De
Guindos, Schauble and the Eurogroup, all announced that the sole
source of cash would be the ESM and/or the EFSF. The problem with
this is that the ESM has yet to be ratified by Germany, whose
parliament said previously it is sternly against
allowing the ESM to fund
a direct bank bailout,
something which just happened. Thus, the successful German ESM
ratification vote, whenever it comes, and which previously was taken
for granted, now appears to be far more questionable.
Which
leaves the EFSF. The problem with
the EFSF is
that there is about €200 billion in dry powder. And this includes
the Spanish quota of €93 billion, which we can only assume is now
officially scrapped.
Which brings us to a bigger question: now that Spain is officially to be bailed out, what happens next. And by that we mean of course the big one: Italy. Recall that as we posted in Brussels... We Have A Problem, once the contagion spreads again to Italy, and that country also needs a bailout, it is game over. From the world's biggest hedge fund Bridgewater:
In other words, it is very likely that the funding for the Spanish bailout will have yet to be procured. Who will provide cash which is virtually certain to disappear forever in the Spanish real-estate market mismarking vortex?
2.
Where will the money go?
According
to the de Guindos press conference, the bailout cash will go to the
FROB, or the Fund
for Orderly Bank Restructuring:
as the name implies a sinking fund to fund insolvent banks. This is
merely a liquidity vehicle to net out evaporating capital due to
realistic marks of assets, or ongoing deposit flight. However, a far
bigger concern is how will the FROB be treated from a sovereign debt
perspective?
As
was noted previously, the bailout will come in the form of a loan,
which while at better terms than market, will still result in a
material increase in Spanish debt/GDP. In other words, while the
bailout itself may have been without sovereign conditions, it will
still impair the country in the eyes of sovereign creditors. And just
as important is the mention that the loan will have "better
terms than market" - this implies added security compared to
general Spanish obligations. Hencepriming.
Recall
the official breakdown of the complete Spanish debt, presented here
courtesy of Mark
Grant 2 months ago:
The
Data
Spain’s
GDP
$1.295 trillion
SPAIN’S
NATIONAL DEBT
Admitted
Sovereign Debt
$732 billion
Admitted Regional Debt $183 billion
Admitted Bank Guaranteed Debt $103 billion
Admitted Other Sovereign Gtd. Debt $ 72 billion
Total National Debt $1.090 trillion
Admitted Regional Debt $183 billion
Admitted Bank Guaranteed Debt $103 billion
Admitted Other Sovereign Gtd. Debt $ 72 billion
Total National Debt $1.090 trillion
SPAIN’S
EUROPEAN DEBT
Spain’s
Liabilities at the ECB
$332
billion
Spain’s Cost for the EU budget $ 20 billion
Spain’s Liabilities for the Stabilization Funds $125 billion
Spain’s Liabilities for the Macro Fin. Ass. Fund $ 99 billion
Spain’s Guarantee of the EIB debt $ 67 billion
Spain’s Total European Debt $643 billion
Spain’s Cost for the EU budget $ 20 billion
Spain’s Liabilities for the Stabilization Funds $125 billion
Spain’s Liabilities for the Macro Fin. Ass. Fund $ 99 billion
Spain’s Guarantee of the EIB debt $ 67 billion
Spain’s Total European Debt $643 billion
----------------------------------------------------------------------
Spain’s
National and European Debt
$1.733 trillion
Spain’s
OFFICAL debt to GDP Ratio
68.5%
Spain’s
ACTUAL Debt to GDP Ratio
133.8%
* *
*
Now
we have another €100
billion or so in admitted sovereign debt to add to the top of the
list. In other words, total Spanish admitted debt
will likely increase by up to 17% from $732 billion to $857, adding
the $125 billion FROB "loan."
3.
What happens to Spanish sovereign debt?
Perhaps
the most important thing to note in the above analysis is that the
FROB loan is effectively a priming DIP: think Troika loans to Greece,
Ireland and Portugal.
In
other words, Spanish bondholders just got their first taste of
subordination!
Basically,
first thing Monday the trade off will be: does the temporary
improvement in bank solvency offset the fact that bonds just got
primed, hinting at a future that in the case of Greece has resulted
in the old Greek bonds trading an equivalent price of sub 10 cents on
the dollar.
How
long until Spanish bondholders get the hell out of Dodge, knowing
quite well that their Spanish bond holdings will suffer the same fate
as GGBs?
Our
advice for those who need to
have exposure, as we wrote 5
months ago: sell
local-law, covenant-lite Spanish bonds, and buy their UK-law,
covenant-protected cousins.
Then
sit back and watch the spread explode.
4.
Precedent
Naturally
with Spain now officially biting the bullet, the only question
remaining is: when
is Italy going to drop next.
And
ironically, what just happened, is that the Eurozone, with the tacit
agreement of Germany, essentially gave insolvent banks a green light
to short
themselves into
a full bailout.
How
long until Italian banks get the hint, and proceed to short each
other, or themselves, either with shares of stock or , better yet,
through CDS which unlike in the sovereign case, can be held without
an offsetting cash basis position. In other words: is it time for the
Italian bank suicide trade?
Because
only when they are on the verge of nationalization, will Italian
banks be rescued. And remember: he who defects (or in this case drops
the fastest), first, reaps the biggest benefits of the resultant
action.
We
also wonder how will Ireland feel knowing that it has to suffer under
backbreaking austerity in exchange for Troika generosity, while Spain
gets away scott free.
Finally,
there is the question of how today's action will impact the Greek
elections. As noted earlier today, today's precedent will likely
serve as a huge boost to the popularity
of Syriza.
Oh yes, the Greek elections next Sunday. Remember those, and
the whole Grexit thing?
5.
Market reaction
The
long-term reaction is obvious: this latest confirmation that Europe
is a sinking ship has been predicted by many for years. As such, that
European risk markets will continue sinking, and capital flows
continue rushing to Germany, is a given. In the short run, however,
courtesy of a new all time record high number of EUR shorts (at a
record -214,418 net non-commercial contracts as of this past week) it
is likely we may see an aggressive short covering squeeze.
This
will send all risk higher as well. Of course, the really is to be
faded aggressively as soon as the weak-hand shorts are capitulate and
cover.
* *
*
For
those curious just what this mysterious FROB is, which simply stated
is, or rather was, a woefully underfunded FDIC equivalent, and is now
the Spanish banking system loophole, here is a succinct presentation:
Finally,
for those wondering if today's action will halt the catalyst for the
entire move, namely the furious bank run that Spain has been
experiencing in the past month, we don't know. It likely all depends
on how many Spiderman towels are in circulation and held in inventory
by Spain's insolvent banks.
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