Sunday 10 June 2012

Spanish Bailout


Spain seeks the kiss of death

Spain Seeks $125 Billion Bailout As Bank Crisis Worsens
Spain asked euro region governments for a bailout worth as much as 100 billion euros ($125 billion) to rescue its banking system as the country became the biggest euro economy so far to seek international aid.

Spain's Economy Minister Luis de Guindos speaks at a news conference in Madrid today

10 June, 2012

The Spanish government declares its intention of seeking European financing for the recapitalization of the Spanish banks that need it,” Spanish Economy Minister Luis de Guindos told reporters in Madrid today. A statement by euro region finance ministers said the loan amount will “cover estimated capital requirements with an additional safety margin.”
Just seven months after winning a landslide victory, Prime Minister Mariano Rajoy was forced to abandon his bid to recapitalize Spanish banks without recourse to external help as a deepening recession forced lenders to recognize spiraling losses. Today’s move means Spain has a firewall in case the Greek election on June 17 unleashes a fresh round of market turmoil.

De Guindos said the terms of the rescue loan are “very favorable” compared with market rates and the funds will be channelled through Spain’s FROB bank fund. Banks getting aid will have to meet conditions, he said. The International Monetary Fund will only have an advisory role, he said.

The eurogroup statement said that the formal request will come “shortly.” An assessment will then be provided by the European Commission, which will liaise with the European Central Bank, the European Banking Authority and the IMF. There will also be a proposal for “the necessary policy conditionality” that will accompany the assistance.

Aid Pressure

European officials have failed to get their arms around a debt crisis that started in Greece at the end of 2009 and has now claimed the euro region’s fourth-largest economy. The bailout adds to the 386 billion euros ($480 billion) in pledges to Greece, Ireland and Portugal that European governments and the IMF have made since 2010.

Spanish officials faced increasing pressure to seek aid over the past week as European leaders race to put measures in place should next week’s Greek election increases the chances that the country will leave the euro. European Central Bank Governing Council member Ewald Nowotny said yesterday that any delay by in requesting aid would increase the costs of a rescue.
The longer you wait with revamp measures, the more expensive it gets,” Nowotny said.

Funding Hole

Spanish borrowing costs have jumped since March and last week rose close to the euro-year high of 6.78 percent. The yield on the country’s 10-year bond has since slipped amid optimism that Rajoy would seek a bailout and was at 6.17 percent yesterday.

The Spanish government’s credibility was jolted by the funding hole reported last month by Bankia group, the third- biggest Spanish lender. The bank’s new managers went beyond the government’s provisioning rules and asked for a 19 billion-euro bailout. Economy Minister Luis de Guindos had said two weeks earlier that 15 billion euros would be enough to meet the requirements of the second of two banking decrees he has drafted this year.

Fitch Ratings downgraded Spain to BBB, within two steps of non-investment grade, on June 7 and said the cost to the state of shoring up banks may amount to as much as 100 billion euros in the worst case, compared with its previous estimate of 30 billion euros.

The Spanish problem was entirely avoidable,” said Thomas Mayer, an economic adviser to Deutsche Bank AG in Frankfurt. “When Bankia got into trouble and they had to inject another 19 billion, the market thought, well, they don’t know what they are doing.”

Commentary from Zero Hedge



Spain IS Greece After All: Here Are The Main Outstanding Items Following The Spanish Bailout






After two years of denials, we finally have the right answer: Spain IS Greece. Only much bigger (it is also the US, although while the US TARP was $700 billion or 5% of then GDP, the just announced Spanish tarp is 10% of Spanish GDP, so technically Spain is 2x the US). So now that the European bailout has moved from Greece, Ireland and Portugal on to the big one, Spain, here are the key outstanding questions.
1. Where will the money come from?

De Guindos, Schauble and the Eurogroup, all announced that the sole source of cash would be the ESM and/or the EFSF. The problem with this is that the ESM has yet to be ratified by Germany, whose parliament said previously it is sternly against allowing the ESM to fund a direct bank bailout, something which just happened. Thus, the successful German ESM ratification vote, whenever it comes, and which previously was taken for granted, now appears to be far more questionable.

Which leaves the EFSF. The problem with the EFSF is that there is about €200 billion in dry powder. And this includes the Spanish quota of €93 billion, which we can only assume is now officially scrapped.



Which brings us to a bigger question: now that Spain is officially to be bailed out, what happens next. And by that we mean of course the big one: Italy. Recall that as we posted in Brussels... We Have A Problem, once the contagion spreads again to Italy, and that country also needs a bailout, it is game over. From the world's biggest hedge fund Bridgewater:




In other words, it is very likely that the funding for the Spanish bailout will have yet to be procured. Who will provide cash which is virtually certain to disappear forever in the Spanish real-estate market mismarking vortex?

2. Where will the money go?

According to the de Guindos press conference, the bailout cash will go to the FROB, or the Fund for Orderly Bank Restructuring: as the name implies a sinking fund to fund insolvent banks. This is merely a liquidity vehicle to net out evaporating capital due to realistic marks of assets, or ongoing deposit flight. However, a far bigger concern is how will the FROB be treated from a sovereign debt perspective?

As was noted previously, the bailout will come in the form of a loan, which while at better terms than market, will still result in a material increase in Spanish debt/GDP. In other words, while the bailout itself may have been without sovereign conditions, it will still impair the country in the eyes of sovereign creditors. And just as important is the mention that the loan will have "better terms than market" - this implies added security compared to general Spanish obligations. Hencepriming.

Recall the official breakdown of the complete Spanish debt, presented here courtesy of Mark Grant 2 months ago:


The Data
Spain’s GDP                                                $1.295 trillion
SPAIN’S NATIONAL DEBT
Admitted Sovereign Debt                                 $732 billion
Admitted Regional Debt                                   $183 billion
Admitted Bank Guaranteed Debt                     $103 billion
Admitted Other Sovereign Gtd. Debt               $ 72 billion
Total National Debt                                         $1.090 trillion
SPAIN’S EUROPEAN DEBT
Spain’s Liabilities at the ECB                           $332 billion
Spain’s Cost for the EU budget                       $ 20 billion
Spain’s Liabilities for the Stabilization Funds   $125 billion
Spain’s Liabilities for the Macro Fin. Ass. Fund $ 99 billion
Spain’s Guarantee of the EIB debt                  $ 67 billion
Spain’s Total European Debt                           $643 billion
----------------------------------------------------------------------
Spain’s National and European Debt                $1.733 trillion
Spain’s OFFICAL debt to GDP Ratio                     68.5%
Spain’s ACTUAL Debt to GDP Ratio                  133.8%
* * *

Now we have another €100 billion or so in admitted sovereign debt to add to the top of the list. In other words, total Spanish admitted debt will likely increase by up to 17% from $732 billion to $857, adding the $125 billion FROB "loan."

3. What happens to Spanish sovereign debt?

Perhaps the most important thing to note in the above analysis is that the FROB loan is effectively a priming DIP: think Troika loans to Greece, Ireland and Portugal.

In other words, Spanish bondholders just got their first taste of subordination!

Basically, first thing Monday the trade off will be: does the temporary improvement in bank solvency offset the fact that bonds just got primed, hinting at a future that in the case of Greece has resulted in the old Greek bonds trading an equivalent price of sub 10 cents on the dollar.

How long until Spanish bondholders get the hell out of Dodge, knowing quite well that their Spanish bond holdings will suffer the same fate as GGBs?

Our advice for those who need to have exposure, as we wrote 5 months agosell local-law, covenant-lite Spanish bonds, and buy their UK-law, covenant-protected cousins.

Then sit back and watch the spread explode.

4. Precedent

Naturally with Spain now officially biting the bullet, the only question remaining is: when is Italy going to drop next.

And ironically, what just happened, is that the Eurozone, with the tacit agreement of Germany, essentially gave insolvent banks a green light to short themselves into a full bailout.

How long until Italian banks get the hint, and proceed to short each other, or themselves, either with shares of stock or , better yet, through CDS which unlike in the sovereign case, can be held without an offsetting cash basis position. In other words: is it time for the Italian bank suicide trade?

Because only when they are on the verge of nationalization, will Italian banks be rescued. And remember: he who defects (or in this case drops the fastest), first, reaps the biggest benefits of the resultant action.

We also wonder how will Ireland feel knowing that it has to suffer under backbreaking austerity in exchange for Troika generosity, while Spain gets away scott free.

Finally, there is the question of how today's action will impact the Greek elections. As noted earlier today, today's precedent will likely serve as a huge boost to the popularity of Syriza. Oh yes, the Greek elections next Sunday. Remember those, and the whole Grexit thing?

5. Market reaction

The long-term reaction is obvious: this latest confirmation that Europe is a sinking ship has been predicted by many for years. As such, that European risk markets will continue sinking, and capital flows continue rushing to Germany, is a given. In the short run, however, courtesy of a new all time record high number of EUR shorts (at a record -214,418 net non-commercial contracts as of this past week) it is likely we may see an aggressive short covering squeeze.




This will send all risk higher as well. Of course, the really is to be faded aggressively as soon as the weak-hand shorts are capitulate and cover.
* * *

For those curious just what this mysterious FROB is, which simply stated is, or rather was, a woefully underfunded FDIC equivalent, and is now the Spanish banking system loophole, here is a succinct presentation:





Finally, for those wondering if today's action will halt the catalyst for the entire move, namely the furious bank run that Spain has been experiencing in the past month, we don't know. It likely all depends on how many Spiderman towels are in circulation and held in inventory by Spain's insolvent banks.

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