This post was written by Stephen Kinsella
Spain’s banks are getting a series of loans. Hooray. The rather vague Eurogroup statement on Spain is here. It’s being reported that Spain will require up to 100 billion euro for its banks, which will be added to its national debt. The money will come in tranches, first from the EFSF, and then later from the ESM. There aren’t specific austerity measures attached to this series of loans. People in Ireland are sure to lose their minds over the fact that there won’t be specific conditionality attached to these loans, and the IMF will be ‘observers’ rather than actually part of a Troika of funders. The talk generally is likely to be something like ‘why couldn’t we get such a deal’, and apparently Minister Noonan will be bringing this up with his colleagues at a later date.
It should be noted however that Spain is already enduring a fair bit of austerity, has already signed up to the Fiscal Treaty, and so will have to produce a `programme’ of sorts under its own steam. Spain’s economy is also in pretty rough shape. I made the chart below from FRED to show household debt as a percentage of GDP (left hand axis) and unemployment in Spain (right hand axis), two variables we should be interested in. Clearly with an unemployment rate heading for 25%, a very indebted household sector, and a set of bunched bank balance sheets, the Spaniards have their work cut out for them even without a further programme of adjustment.
A few things to consider:
1. Will treating Spanish banks separately (in some sense) to the sovereign prevent its bond yields from spiking?
2. What will the effect on the EFSF and ESM balance sheets from a large scale Spanish ‘withdrawal’?
3. Will everyone now immediately target Italy (or Belgium) as the next domino to fall?
This entry was posted on Saturday, June 9th, 2012 at 8:03 pm and is filed under Banking Crisis, EMU. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
Peter Says:
June 9th, 2012 at 8:25 pm
How is a loan “capital” for a bank? A form of bank bond guaranteed by the sovereign, perhaps? How would this prevent sovereign rates from rising?
Stephen Kinsella Says:
June 9th, 2012 at 8:28 pm
@Peter, the loans are funneled through the Fund for Orderly Bank Restructuring which will act “as agent” of the Spanish government, and so can receive the funds and channel them to the banks.
The spreads may of course blow up, but they may not.
Ceterisparibus Says:
June 9th, 2012 at 8:34 pm
“Irish Finance Minister Michael Noonan this evening said the Spanish deal will not mean a better deal for Ireland on its banking debts.
Speaking in Limerick, Minister Noonan said the deal agreed with Spain replicates the recapitalisation part of the deal that was done for Ireland.
He described the deal as “satisfactory” and said it would bring about much needed stablity to the eurozone.
Minister Noonan said that he would have preferred if the money was pumped directly into the Spanish banks rather than through the sovereign and he said he would expect the same to apply to Ireland.”
What is stopping us from requesting EFSF/ESM money (64 billion) to replace the funds we used to recapitalize the banks?
Tullmcadoo Says:
June 9th, 2012 at 8:41 pm
CP,
Where did our bail out money come from?
Some from official sources, some from the NPRF-already borrowed- some from the PN s which are extremely cheap funding at maybe 1% .
Dom K. Says:
June 9th, 2012 at 8:50 pm
I think the link between the sovereign and the banking system is by now clearly established so this window dressing will hardly save the Spanish bond yields from rising. Besides, banks are only a part of the story. What about regions? Catalonia is bust? Cajas are covered with fig leaves.
Dom K. Says:
June 9th, 2012 at 8:55 pm
Also note that each country is treated differently, although it is difficult to see how is the Spanish case different from the Irish case. Except that Spain is too big to push around and the Irish were pesky in good days. But this hypocrisy clearly shows how the EU politics work (at least for those half-blind idealists who failed to see that long ago).
Joseph Ryan Says:
June 9th, 2012 at 9:19 pm
@Stephen Kinsella
re “The rather vague Eurogroup statement on Spain is here.”
Vague indeed.
Spain wins.
“The Spanish government will retain the full responsibility of the financial assistance and will sign the MoU.”
I wonder how that translates into Spanish.
What is ‘full responsibility of the ‘financial assistance’.
Note that it is not ‘full responsibility for the financial assistance’.
Will Spain sign a ‘promissory note’ to pay it back. I doubt it. It does not read that way.
And how much:
“The loan will be scaled to provide an effective backstop covering for all possible capital requirements…”
Spanish banks are being covered for ‘all possible capital requirements’. No Limit.
Spain wins. I am delighted. Ecstatic.
European banks are to be bailed out from central funds, with the sovereigns retaining only;
“the full responsibility of the financial assistance “, which can mean everything or nothing.
Well done, Spain.
seafóid Says:
June 9th, 2012 at 9:23 pm
@ CP
“He described the deal as “satisfactory” and said it would bring about much needed stability to the eurozone.”
Until Wednesday lunchtime
I think there’s $370bn managed by either macro hedge funds or all hfs and they have these very fancy spreadsheets and they can run surveys of what people are saying on facebook and figure out how the S&P 500 will move at 10.15 on the last Tuesday of April but they have no clue what is going to happen in the next 2 months in the EZ because you can’t model it in Excel because the assumptions depend on variables such as what side of the bed people get out of . And it has the potential to be like like those Hindu pilgrimages where someone trips and there’s a stampede. But they aren’t really afraid yet so the Endloesung isn’t yet on the cards.
David O’Donnell Says:
June 9th, 2012 at 9:30 pm
Germany’s finance minister, Wolfgang Schäuble, praised the reforms undertaken thus far by Spain, calling the teleconference “constructive” and saying in a statement that “Spain is on the right path and Germany, just like the other countries and institutions of the euro zone, as well as probably the I.M.F., will support Spain on that way.”
The money will be channeled through the Spanish bank-bailout fund but the Spanish government will ultimately be responsible and will have to sign the memorandum of understanding and the conditions that come with it.
Mr. de Guindos said that the terms of the emergency loan would be “very favorable” but only set in coming days. He noted that “not all the financial institutions need capital,” adding that “the problem that we face affects about 30 percent of the Spanish banking system.”
Robert Tornabell, banking professor at the Esade business school in Barcelona, said that despite the government’s insistence to the contrary “what has just been agreed is in fact a bailout, just like what had to be done for Ireland because of its banking problems.”
Certain Tentacles have relaxed … matrixsQuidesque like …
@Spanish citizen_serfs
In solidarity – let’s get together …?
David O’Donnell Says:
June 9th, 2012 at 9:34 pm
… meanwhile the roman_serfs are lining up to be crucified on the Appian Way … again …
David O’Donnell Says:
June 9th, 2012 at 9:37 pm
German firms urge rejection of stability mechanism
They ‘come out’ in favour of old-style capitalism …
A protest letter signed by 350 of Germany’s best-known companies such as Kärcher, Henkel and Würth attacks the bailout fund and disputes what it calls the “myth that Europe can only survive as a transfer union”.
The companies take issue with “political whitewash” over the euro, which it sees as a “driving force for dispute, jealousy and hate” in today’s Europe.
“The coercion and consequences of a common currency are beginning to divide European peoples permanently,” said the statement. “Not every means is permitted to save the euro – and those who want to save the euro at any price risk the price being Europe.” With its statement the association joins a growing wave of protest against the European Stability Mechanism in Germany.
http://www.irishtimes.com/newspaper/world/2012/0609/1224317568965.html
At least 10 government MPs are planning to vote against the ESM. They are calling for a “debt-conversion mechanism”, allowing crisis countries to receive funds and retain budget sovereignty while participating in an International Monetary Fund-chaired arbitration procedure with creditors to decide on debt write-downs.
DOCM Says:
June 9th, 2012 at 9:44 pm
@ All
FYI
http://www.efsf.europa.eu/attachments/efsf_guideline_on_recapitalisation_of_financial_institutions.pdf
The Spanish deal is so much window-dressing! The country’s misfortune may well be that the conditions under which it will get the necessary loans are not made sufficiently public.
bazza Says:
June 9th, 2012 at 9:51 pm
These are important issues and thanks for the post, Stephen.
In my opinion it doesn’t matter about the conditionality or the “observation” as opposed to participation of the IMF. In short, who cares? The fact is that the loans will be added to the Spanish national debt, so the end result will be same as in Ireland.
Pride concerning the supervision of external agencies is a non-issue. Maybe Rajoy can claim a small victory both the only good outcome that was possible for Spain was if the EFSF/ESM (partly) recapitalised Spanish banks directly. That was never going to happen and the rest of the details amount to inconsequential squabbling and political point scoring.
TO answer the specific questions:
1. the end result to the Spanish debt burden will be the same as in Ireland, so unless there is a legal distinction or seniority between this bank debt and Spanish sovereign debt, then yields on Spanish debt will keep on climbing (I presume EFSF and ESM debt is senior to existing Spanish sov debt).
2. What do you mean by Spanish “withdrawal”? If you mean a Spanish exit form the EZ, then the whole currency is finished.
3. Belgium will not be targeted next – its debt is under 100% of GDP. I don’t think Italy will be targeted either – there aren’t huge losses on Italian banks’ balance sheets (apart from unrealised sov debt losses) and the sovereign’s debt is already unsustainable, absent LTRO.
From here it will be a gradual escalation of the losses in Spanish banks and more bank runs. The Spanish public will not tolerate such high unemployment for long and the mounting sovereign debt will make it irreversible. Even if everything goes smoothly in Greece, Spain will leave the Euro within 12 months, unless there is a major shift in policy.
From our point of view who cares that they have had to endure full bailout supervision. At the end of the day Spanish debt will become unsustainable just like Ireland’s. Hopefully, this will become one more nail in the coffin of the current policy direction.
When it comes the Germany/ECB/Bundesbank, my attitude now is give them everything they want – when they have enough rope they will hang themselves.
DOCM Says:
June 9th, 2012 at 9:53 pm
@ All
The view from London! It’s all the fault of those pesky Continentals. Without their inability to sort out the problems of the Euro Area, the UK would be booming. Now, with regard to the matter of the European Banking Authority being located in London on our insistence….
http://www.telegraph.co.uk/news/politics/9320913/We-will-not-prop-up-Europes-banks.html
bazza Says:
June 9th, 2012 at 9:55 pm
@Joseph Ryan
I do not know the details, but it appears these loans are bone fide Spanish sovereign debt that is senior to all other Spanish debt. If this is the case, then Spain definately does not “win”.
Does anyone else have an opinion on this?
David O’Donnell Says:
June 9th, 2012 at 10:08 pm
@Bazza
I’m waiting for UDI in Barcelona and Catalonia. Bit o form there …
This is a trillion dollar disaster for Spain …. the sovereign is destroyed in a rapid exponential …
Joseph Ryan Says:
June 9th, 2012 at 10:10 pm
@Bazza/ @Stephen Kinsella.
My previous post was not well worded. I fully agree with Stephen Kinsella that the wording is vague. But why is it vague?
The bottom line is will the Spanish sovereign have to sign a promissory note to pay back the funds. It does not sound that it must or that it will.
And by routing all funds through FOBR or some such vehicle, Spain is keeping its distance from theses loan funds and the banks.
That is why I say, Spain wins. Of course I could be wrong. I certainly will be wrong if we see Spanish ink on a promissory note.
Tullmcadoo Says:
June 9th, 2012 at 10:13 pm
It wont be long before Spain loses Market access, followed quickly by France, due to Francois’ fiscal incontinence. Then it is print or bust.
As a sovereign , we should prepare for the worst. Balance the books now.
DOCM Says:
June 9th, 2012 at 10:14 pm
@ Joseph Ryan
Why not simply read the EFSF guidelines to which I have linked above?
Eureka Says:
June 9th, 2012 at 10:30 pm
Just leaked:
Article 14 of the MOU states that Spain will face additional penalties if they beat Germany in the European Championships…
Honestly though this is window dressing. The Spanish govt has respinsibuty for the FROB. So it will end up paying what the banks cannot (and that’s likely to bd a lot…!)
Joseph Ryan Says:
June 9th, 2012 at 10:50 pm
@DOCM
Thank you for the link above: I have attempted to read it but would contend that the circumstances of the new Spanish deal do not appear to be fully covered by the document you refer to:
The nearest I can get to sovereign liability is this piece:
“The initiative to request support shall come from the government, which will indicate the institution(s) in distress, which eventually will receive the loan. This loan will be channelled through the national authorities, which ultimately bear the liability of the loan.”
The first question is whether the loan is being channelled through the ‘national authorities’. The Spanish sovereign itself has studiously avoided this , even though FROB may fit the bill.
The second point is that a contingent liability is just that. There is no promissory note that ‘has’ to paid on a certain date.
I still think Spain won notwithstanding the EFSF document. However I do acknowledge that the EFSF (as per the document ) can try to stick up more specific rules to entrap Spain more securely. Though Spain would be likely to resist such impositions.
The Alchemist Says:
June 9th, 2012 at 10:53 pm
@stephen
The coverage as i have read it, and possibly misunderstood, is that the Spanish deal was jointly agreed with other Euro finance ministries.
So my question is why did Noonan sign up to a deal that on the face of things is simply better for the sovereign?
Presumably part of the ‘vote yes’ spin was the likelihood of Ireland ‘doing a Spain’ on its debt.
ESM for the big boys, and IMF for the rest?
Mark Says:
June 9th, 2012 at 11:40 pm
re- David O’Donnell on the German firms.
How much clout will this carry ?
I have to say that it sounds good to my ears, but I’m afraid of going on appearances too much.
‘They are calling for a “debt-conversion mechanism”, allowing crisis countries to receive funds and retain budget sovereignty while participating in an International Monetary Fund-chaired arbitration procedure with creditors to decide on debt write-downs.’
Back to friendly, common-market relations, and let’s jettison the Unification Psychos who turned the EU flag into a sinister-looking Masonic ‘Eye’ ?
One can only hope.
