Spanish collapse

Spain's empty highways lead to bankruptcy

Like the housing bubble, pumped up until it burst in 2008, and its speculation-funded phantom airports, the folly of Spain's road-building boom too is now being laid bare in vast stretches of tarmac.

A road on the Spanish island of La Gomera

phys.org,

28 October, 2012

At the Leganes toll booth outside Madrid, the workers scan the horizon for cars. In Spain's recession, the stream of paying drivers has slowed to a trickle and the toll road is all but bankrupt.

Like the housing bubble, pumped up until it burst in 2008, and its speculation-funded phantom airports, the folly of Spain's road-building boom too is now being laid bare in vast stretches of tarmac.

"Right now we can't meet our debt repayments. We are in the hands of the judge," said Jose Antonio Lopez Casas, director of Accesos de Madrid, the company that manages two major highways around the capital.

The two highways, Radial 3 and Radial 5, opened in 2004 at the height of Spain's construction boom. Now the company owes 660 million euros ($850 million) to the bank, 340 million to the builders and 400 million to residents evicted to build it.

Since the Madrid-Toledo highway entered bankruptcy proceedings in May, the trend has spread, with five other major routes following.

"It's no surprise," says Paco Segura, a transport specialist at the environmental campaign group Ecologists in Action.

"In Spain, just as there was a real estate bubble, there was also a bubble in infrastructure, and one of the areas that got most developed was the motorways," he added.

"We built thousands and thousands of kilometres of motorways on routes that did not have the traffic concentration to justify it."

The craze drove Spain to break records: it became the country in Europe with the most kilometres of motorways and the most commercial international airports, and was second only to China in the world for the length of its high-speed train lines.

But while the state was approving all these projects by private companies, it was also developing a network of toll-free highways, naturally preferred by drivers.

In the first quarter of this year, with Spain in recession, motorway traffic fell 8.2 percent compared to a year earlier, hitting its lowest level since 1998, the transport ministry said.

"Traffic around Madrid has fallen by between 15 and 20 percent in the past five years," Lopez said. "In our case it has fallen by much more," he said of his toll roads.

"The economic situation makes the cost of a toll road much more of a factor in deciding whether to take a route or not, when there is a free alternative of sufficient quality," said Jacobo Diaz, director of the Spanish Road Association.

"The demand has clearly been overestimated. The actual volume of traffic is about a quarter of what was forecast."

Ecologists in Action estimates the motorway between Madrid and the city of Toledo receives 11 percent of the traffic its developers expected.

Around Madrid, meanwhile, "nearly all the motorways which are going bust are not getting 40 percent of the traffic they planned for when they were built," said Segura.

On the Accesos de Madrid roads, "where there were supposed to be 35,000 vehicles a day, there are 10,000," said Lopez, who holds out little hope of state aid amid the wave of public spending cuts in the recession.

"Too much infrastructure was built, no doubt about it. Much of it turned out to be no use," he said.

"It has happened with the motorways, it has happened with the airports," said Lopez. "Sooner or later we will found it is happening with the high-speed trains."

Spanish Banks May Face €17 Billion Margin Call As ECB Found To Lie About Collateral Haircuts

Zero Hedge, 

4 October, 2012

Mario Draghi has reassured the world that no matter how much 'crap' collateral is taken on to the ECB's balance sheet, their risk management process is rigorous and ensures the safety of the entity's capital thanks to well-devised haircuts and collateral. Once again, it appears from a report in Die Welt (via Bloomberg), Draghi lied, as the ECB is now checking terms on some lending to Spanish banks that may have already contravened the ECB's mandate allowing overly generous terms to be offered on the Spanish banks' collateral. As Bloomberg notes, the issue surrounds EUR80bn relatively short-dated T-Billswhich were wrongly classified as rated 'A' instead of the 'B' that agencies - except DBRS! - had assigned (a vast difference) - which would imply (if the ECB re-assigns the correct rating) the affected Spanish banks would have to produce up to EUR16.6bn in additional collateral (cash or quality collateral that is non-existent in Europe). This of course "casts doubt on the quality of the ECB's risk management" and merely serves to confirm the Juncker-ian lies we have come to expect from Europe's leaders (economic and political).

As a reminder, we warned of exactly this back in April and it seems the ECB has merely chosen to ignore it for months:

...The first is 5%. This is the haircut increase that ECB collateral will require once all ratings agencies shift to BBB+ or below (meaning massive margin calls and cash needs for the exact banks that are the most exposed and least capable of achieving said liquidity)...

and it appears that the ECB read our report of what could happen, comprehended its severity, and decided that it would be best to not let that collateral crunch happen. As to how to avoid it happening? Simple: ignore its own collateral rules!

Via Die Welt (Google Translated):

ECB Lends Spanish Banks More Money Than Allowed

The European Central Bank has Spanish banks borrowed 16.6 billion euros. But the collateral do not even meet the individual requirements of the central bank.

 

It is a subject in which representatives of the European Central Bank , always place a look that will inspire confidence and simultaneously acts annoyed. Repeatedly accuse critics of the ECB, it was almost mindlessly generous with the securities, the banks have to pledge as collateral for their Fed loans, they now accept any junk.

 

And again countered ECB President Mario Draghi stressed such accusations cool. "The risk management of the ECB is really very careful and has earned this recognition, "he said, for example, in the spring, after Bundesbank President Weidmann warned of growing risks in the central bank's balance sheet. And shortly afterwards the Italians said, even ironically, central bankers made ??their "likes to worry about things that no one else cares to make."

 

Fed much more lax than the official line

 

But apparently makes you look in Europe rather too little to worry about the risk policy of ECB . Because the actual line of the central bank is much more lax than the official. Currently, the shows in dealing with Spanish bonds. Loans of up to EUR 16.6 billion commercial banks have received from the central bank, although the money toresearch the "Welt am Sonntag" should not have got - if the ECB would apply their own statutes strictly.

 

Because the Spanish government bonds, the banks have been pledged as collateral to satisfy the requirements of the Central Bank only partially. The huge sum of 16.6 billion in itself is alarming - but even more alarming is that the ECB seems certain risks simply overlooked. Either from carelessness or intent. Neither is reassuring.

 

Banks can borrow money at 0.75 percent

 

Since the peak of the financial crisis, Europe's banks can borrow unlimited amounts of money from the central bank, currently the tiny interest rate of 0.75 percent. The only limit: you must pledge securities or credit claims as collateral for the central bank to get their money back.

 

The requirements for these securities, the Governing Council has scaled down over the past few years more and more. And that the central bank in practice might not even with these lax requirements taken very seriously, showing its current handling of Spanish government bonds with up to 18 months duration, so-called T-bills.

 

Whose volume is now running at 80 billion euros.

  ...

Spanish T-bills do not meet solvency rules

 

The problem is that T-bills no longer fulfill the conditions for this first-class credit rating. Papers from 66.5 billion euros are really just second class and should therefore under ECB rules are provided with a higher discount of 5.5 percent - which would mean 3.3 billion euros less credit for the banks. The remaining T-bills in a volume of EUR 13.3 billion figure is only mediocre - they would no longer accept the central bank as collateral.

 

The decisive criterion in this business rating scores. In the highest rating category include only securities from at least one rating agency with the "A" grade. This is at issue T-bills is not the case: they come from the major rating agencies, Standard & Poor's, Moody's and Fitch are only notes in the 'B' range and therefore only second-rate securities. For two of the bonds, there is only one note from S & P, and not even enough for the lowest category.

 

ECB accepts little known rating agency

 

Confronted with the peculiar reviews, the ECB provides answers only raise new questions. First, she asserts, everything has its accuracy. The haircuts for the Spanish T-bills are "properly calculated because the rating from DBRS currently 'AL' is'. In fact: The little-known, but by the ECB recognized rating agency DBRS Spain has awarded an "A (low)", still a first class classification.

 

However, this grade is according to the agency really only useful for long-term debt of Spain, short-term credit awards not DBRS. The ECB is challenging not to: Such ratings would be accepted for short-term bonds, the central bank can do. Of which is the official, after all 148 pages of rules for the strong valuation of collateral course nothing. The ECB points to another, non-public Manual - to the derogation was captured, and had been since 1999.

 

For Ireland seem to apply different rules

 

Strange though: Up to Ireland seems to be the secret handbook not yet penetrated . Because even though Ireland is by DBRS also rated "A (low)", the Irish central bank considered the T-bills the Irish Government only as second class and provided with correspondingly higher markdowns, to the detriment of the local banks that these papers-ECB collateral use. And the Irish are committed to this approach: Twice the Irish central bank explicitly confirms the classification made ??was incorrect. The two T-bills had their own rating to "B"-level classification in a better risk category is not appropriate, therefore.

...

ECB refuses to clarify the facts

 

For the banks that hold these T-bills, such a correction would be highly controversial. So far, the government securities they were for a good deal. You can borrow from the ECB for only 0.75 percent of money and buy it T-bills, which bear interest at 2.8 percent. But with a downgrading of securities throughout the calculus would zunichtegemacht, instead funding problems could even threaten. Because in this case they would have other collateral of up to 16.6 billion euros in their book. Or they have to repay central bank loans and get the money from other sources.

 

The ECB found itself by the end of the week not in a position to investigate these oddities in their security policies. The issue would be examined, a spokesman said simply. In general, the ECB refers to the fact that most European banks had deposited with the central bank more collateral than the loans granted is actually necessary.

 

Spain would support themselves if necessary banks

 

Whether this is also true for all the Spanish banks remains unclear. Finally, many institutions in the country battered and get fresh money almost exclusively from the central bank. In the worst case, the banks would have to ask at the Bank of Spain to expensive emergency loans. A step on the way the ECB would not tell the public.

 

Confidence in the central bank to strengthen this kind questionable steps, anyway. It swings the ECB to just become more powerful, they will soon also control the banks. But they should do so credible when they are not even their security policy for banks, their very own business, under control? Critical observers ask is: who actually controls the ECB?

So, the ECB defends its decision for Spain on the back of a lone rating agency DBRS holding an A-Low rating (which itself says is not representative) and also is in direct opposition to the treatment of Ireland (which is collateralized as a 'B' rated credit while also maintaining an 'A-Low' rating with DBRS!).

So it would appear that if a hedge fund really wanted to see Draghi sweat and bring Europe's teetering-on-the-brink edifice to its knees, it merely needs to pick up the phone and request DBRS to create report on Spain's short-term financial health - since surely they like the other three raters will see the dismal and accelerating worse state of economic dysphoria and be unable to maintain an 'A' rating on this nation?

We sense Irish eyes will not be smiling and Draghi's nose may be growing once again... and we laid out the implications here.

This is now the story of the weekend!