Spain dominates the headlines

Spain to inject 6 billion euro into FROB bank fund: source

The Spanish Treasury will inject 6 billion euros ($7.6 billion)into the state's bank rescue fund to beef up its firepower after the emergency recapitalization of troubled lender Bankia (BKIA.MC), a source from the Economy Ministry said on Tuesday.

Reuters,

4 September, 2012,

The FROB fund will receive both state debt and cash, the source said, adding that the operation would boost its capital base to 15 billion euros from 9 billion.

"This has happened because of Bankia's recapitalization," the source said on condition of anonymity.

The FROB on Monday approved an immediate capital injection of 4.5 billion euros into Bankia.

The source also said the move should not impact Spain's liquidity position in a substantial way. The country's cash balance has shrunk in recent months as fiscal revenues fall short of expectations.

Spain is inching towards seeking international aid after requesting a 100-billion-euro European credit line for its battered banks in June. Sources told Reuters last month that negotiations were under way.

Fears Rising, Spaniards Pull Out Their Cash and Get Out of Spain

CNBC,

4 September, 2012

It is, Julio Vildosola concedes, a very big bet.

After working six years as a senior executive for a multinational payroll-processing company in Barcelona, Spain, Mr. Vildosola is cutting his professional and financial ties with his troubled homeland. He has moved his family to a village near Cambridge, England, where he will take the reins at a small software company, and he has transferred his savings from Spanish banks to British banks.

“The macro situation in Spain is getting worse and worse,” Mr. Vildosola, 38, said last week just hours before boarding a plane to London with his wife and two small children. “There is just too much risk. Spain is going to be next after Greece, and I just don’t want to end up holding devalued pesetas.”

Mr. Vildosola is among many who worry that Spain’s economic tailspin could eventually force the country’s withdrawal from the euro and a return to its former currency, the peseta. That dire outcome is still considered a long shot, even if Spain might eventually require a Greek-style bailout. But there is no doubt that many of those in a position to do so are taking their money — and in some cases themselves — out of Spain.

In July, Spaniards withdrew a record 75 billion euros, or $94 billion, from their banks — an amount equal to 7 percent of the country’s overall economic output — as doubts grew about the durability of Spain’s financial system.

The withdrawals accelerated a trend that began in the middle of last year, and came despite a European commitment to pump up to 100 billion euros into the Spanish banking system. Analysts will be watching to see whether the August data, when available, shows an even faster rate of capital flight.

More disturbing for Spain is that the flight is starting to include members of its educated and entrepreneurial elite who are fed up with the lack of job opportunities in a country where the unemployment rate touches 25 percent.

According to official statistics, 30,000 Spaniards registered to work in Britain in the last year, and analysts say that this figure would be many multiples higher if workers without documents were counted. That is a 25 percent increase from a year earlier.

“No doubt there is a little bit of panic,” said José García Montalvo, an economist at Pompeu Fabra University in Barcelona. “The wealthy people have already taken their money out. Now it’s the professionals and midrange people who are moving their money to Germany and London. The mood is very, very bad.”

It is possible that the outlook could improve if the European Central Bank’s governing council, which meets Thursday, signals a plan to help shore up the finances of Spain and other euro zone laggards by intervening in the bond markets.

But right now, if anything, Spain’s picture is growing dimmer.

On Friday, the government’s bank rescue fund said it would need to pump up to 5 billion euros into the failed mortgage-lending giant Bankia, which the state seized in May. And on Monday, Andalusia became the latest of Spain’s semiautonomous regions to ask the central government for rescue money.

The wider prospects for the euro zone are also still bleak. Moody’s [MCO 39.72 0.12 (+0.3%) ]Investors Service said on Monday that it had changed its outlook on the AAA rating of the European Union to negative, and that it might downgrade the rating if it decides to cut the ratings on the union’s four largest budget contributors.

Spain’s gathering gloom comes despite a gradual return of capital to banks in Greece and the relative stability of deposits in those other euro zone trouble spots, Italy, Ireland and Portugal.

The continued exodus of money and people from Spain could be a warning to European policy makers that bailing out the country — a step now widely expected — may not stem the panic as long as the Spanish economy remains in a funk.

It was a lesson learned in Greece, where despite successive European bailouts, about a third of deposits have been withdrawn from its banks since 2009, as the public worried that Athens might have to return to the drachma.

Spain is still a far cry from a nearly bankrupt Greece: it has a much larger and more diverse economy, lower levels of debt and a bond market that is still functioning.

It might be more accurate to say that money is leaving Spanish banks at more of a jog than anything close to a sprint.

Although retail and corporate deposits are down 10 percent compared with those of July 2011, the country remains relatively rich in savings, with 2.3 trillion euros in overall deposits, according to data from Morgan Stanley.

But once under way, the flight of bank deposits can easily overwhelm rational facts and analysis.

Setting off the flight was the failure of Bankia, which came as a shock to Spanish savers who had been assured by government officials that the bank was in good shape.

Instead of calming fears, the state takeover prompted comparisons to Argentina in 2001, when peso bank accounts denominated in dollars were frozen in order to stem the flight of deposits.

The corralito, or corral, as the Argentine action is known, has become part of the public conversation in Spain. The million-plus Argentines who have since immigrated to Spain have provided ample and gory stories of desperate legal battles and wiped-out savings.

Eduardo Pérez, a Spaniard who was working in Argentina during that period, remembers the events all too well. He said he lost four-fifths of the money he had kept in an Argentine savings account, though he declined to say how much money was involved.

“Some of my friends lost everything,” Mr. Pérez said. “So yes, everyone in Spain knows about the corralito.”

Recently, Mr. Pérez, who lives in the northern city of Bilbao, removed about a third of his euros from his Spanish savings account and sent them to Singapore, converting them to Singapore dollars.

Having lost his job at a multinational company a few months ago, Mr. Pérez, 48, is trying to make ends meet by focusing on his travel Web site and blog, which aggregate Spanish-language travel videos.

But as the job outlook worsens, he is contemplating following in the path of his savings and starting a new life in Singapore with his wife.

“Two years ago, we never would have thought of this, but now I have real fears that there will be a breakup with the euro,” he said. “And when you keep hearing people saying, ‘Don’t worry, it’s not going to happen’ — well, that is when you have to start worrying.”

Analysts said that the record-high outflow from Spain in July was probably spurred in part by July’s being a taxpaying month for many corporations, which prompted them to withdraw cash from deposit accounts.

Also playing a role were investment funds that moved cash reserves to foreign banks in light of the credit downgrades at Spanish banks.

Still, as the examples of Mr. Vildosola and Mr. Pérez show, individual deposit flight is becoming more pronounced.

Some people are willing to fly to London for the day just to open an account there, as most banks in the city require such transactions to be made in person.

Spanish bankers working for British financial institutions say they have been hit with a barrage of questions about how to open savings accounts in London.

“It seems as if everyone I know in Spain is getting on an easyJet to come to London and open a bank account,” said one such banker, who spoke on condition of anonymity, citing his company’s policy.

That is what Mr. Vildosola did before he took the more drastic step of moving his family to England.

“It’s sad,” he said. “But I just don’t think there is a future for me in Spain right now.”

Spain's Capital Flight Now Worse Than Asian Financial Crisis

The flight of capital from Spain is now worse than what Indonesia, one of the hardest hit countries during the Asian financial crisis, experienced in the late 1990s, according to analysis by Nomura.

CNBC,

4 September, 2012

On a three-month rolling basis, portfolio and investment outflows from Spain totaled 52.3 percent of the country’s gross domestic product (GDP), (that's) more than double the outflows from Indonesia, which reached 23 percent of GDP at the time of the Asian crisis, Jens Nordvig, global head of G10 FX strategy at Nomura wrote in a note to clients on Tuesday.

Spaniards and foreign investors have been pulling money out of Spanish banks as the economy has worsened in recent months, and Nordvig said without the single currency and the flows from the ECB, Spain would already be going through a major currency crisis. (

We would stress that the broad-based nature of the capital flight, which involves both banking claims and securities and flows from both residents and non-residents, makes for a rather extreme overall outflow, and one that raises serious concerns about the implications for banking sector stability and economic growth,” Nordvig wrote.

According to Nomura, there are plenty of explanations for this, including the fact that the Spanish economy is more leveraged than Indonesia’s and the currency union allows very large capital movements to take place.

Data from the Bank of Spain, which Nomura highlighted, showed foreigners were large sellers of Spanish securities in the latest quarter, which generated an outflow of 19.4 percent of GDP. There was also a large outflow from Spanish residents accumulating foreign bank claims. In the latest quarter, the outflow from this source was 16.7 percent of GDP.

Spain is now front and center in the latest round of the euro zone debt crisis but the Spanish government has so far resisted asking for a bailout from the European Union and other international creditors, except for the aid already agreed to for its banking sector. (Read More: Spain Faces Post-Holiday Detox as Time Runs Out)

But Nomura’s economics team believes that Spain won’t be able to avoid a full-blown bailout, which would include a more active role of the ECB in the Spanish bond market.

“The scale of capital flight that took place over the last few months in Spain supports this view,” Nordvig said.

Italy and Spain Diverge

The capital outflows also show that Spain’s fortunes seem to be worsening much faster than those of Italy, a country with a much higher debt-to-GDP ratio.

“In Italy's case, both portfolio outflows and other investment outflows represent a touch more than 5 percent of GDP. For Spain, both sources of outflows are much larger; about 20 percent of GDP in the case of portfolio outflows and about 30 percent in the case of other investment outflows,” Nordvig said.

Nordvig also pointed out that while bank deposits had fallen at Spanish banks, they had remained quite stable at Italian banks

Comments from New Zealand's Bernard Hickey