Spain - Backdoor Monetary Financing

Lifesaving Injection of Debt

Mish's Global Economic Analysis,

5 September, 2012

The bailout schemes get sillier and sillier. The Spanish bank Bankia has requested €19 billion in state aid, but in Bizarro World fashion will instead receive €4 billion in debt which it would then swap with the ECB for cash.

Please consider Madrid plans to inject Bankia with debt.

Madrid is planning to provide €4.5bn of stopgap rescue money to Bankia, the nationalised bank, by injecting it with Spanish government debt, in a move likely to reignite debate over how states can use the European Central Bank to recapitalise troubled lenders.

The Frob, Spain’s state bank bailout fund, will issue BFA, Bankia’s parent company, with €4.5bn of government bonds, said a spokeswoman for the economy ministry.

This gives the bank the possibility of depositing the bonds with the ECB as collateral in return for cash.

The bonds will later be returned by Bankia to the Frob after the arrival of €100bn in European aid for Spanish banks in late October or November.

The ECB declined to comment on Bankia or the Spanish government’s plans. But any attempt to help Bankia create collateral in this way could well founder on rules designed to prevent so-called monetary financing.

The contortions the ECB goes through just so it can say it is not doing monetary financing are staggering.

Indeed, the entire Target2 scheme is nothing but backdoor monetary financing.

For details, please see  Discussion of Target2 and the ELA (Emergency Liquidity Assistance) program; Reader From Europe Asks "Can You Please Explain Target2?"