Tuesday, May 29, 2012

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.

1 comment:

Rik said...

Some remarks:
1. It isnot mainly about spreads it is mainly about (absolute) borrowingcosts.
The problem is that these costs are unsustainable. Spreads are per se not unsustainable. A rise in spreads could partially be compensated by a drop in riskfree (Bundyields), as it partially is with Spain at the moment.
Basically interest consist of 2 items: Bund-yields (risk-free) plus spread. In which spreads are a measure for risk. What we have here is that the combination of risk-premium plus risk-free is unsustainable.

2. If Spain is going to finance it by indirectly 'printing money' it is not very likely to gain much confidence in markets.
The suggestion of paying capital in by way of gov bonds that are subsequently put as collateral with the ECB is effectively simply a monetary financing of this recap.
One of the problems of the whole EZ-rescue is simply that hardly any real money is involved, but it is guarantees often by the ones that have financial problems galore.
ECB heavily against anyway.

3. Spain will continue to move in this direction as there will be on one side less and less money to buy its bonds and on the other the supply of these bonds (debt) is likely to rise (because of eg bankrescues (and because the austerity moves much slower than the running out of LTRO money on the other side)).
So even if the fundamentals (and the markets judgement of that would remain the same, but they look to get worse and worse). There will be increased selling pressure with as result higher yields.
Only a bail out or ECB programm can stop that realistically (recession being only minor and short term (aka good news) simply doesnot look realistic).

It is moving down South and has got in the chain reactions of:
- bad banks and likely regions needing rescues and subsequently make gov finances even worse; and
- economy goes bad so both banks as regions are making more losses?higher deficits.