http://globaleconomicanalysis.blogspot.com/2012/05/new-confusion-over-hispanbonos-and.html

Thursday, May 31, 2012 11:42 AM

New Confusion Over Hispanbonos and Regional Debt: Spanish Regional Government Accounting Postponed, Press Conference by Montoro is Postponed; Regional Government Debt Issuance Method Unclear

My friend Bran who lives in Spain writes ...

Hello Mish

There is new confusion over hispabonos and regional accounting. Spanish regional government accounting has been delayed, a press conference by Montoro is delayed, and the joint government/regional government debt issuance method is still not completely clear.

Bran

Hispabonos are central government guarantees of regional debt. The regional governments want central guarantees because without them, interest rates will skyrocket.

Presentation of Accounting Postponed

Courtesy of Google Translate from El Economista: The Government postponed the presentation of the accounts of the CCAA's first quarter

The Ministry of Finance has decided to postpone the press conference that he would publish the budget execution of the regions for the first quarter of the year in the National Accounts. Montoro endorse autonomy and park each issue of 'hispanobonos.

The hearing, scheduled for 17:00 am today, was postponed because Cristobal Montoro "presented tomorrow to the Council of Ministers a report on the evolution of these data," the statement sent by the Department.

Financing

Predictably, Montoro will also benefit the Council of Ministers to discuss a new system of funding helps communities, claimed in a while.

Autonomy asked directly the implementation of hispanobonos, although the executive has never been convinced of this option by the risk that the cost encareciera Treasury issues and weaken the 'rating' of Spain.

The most reasonable for the Department led by Montoro endorse passes through debt issues of the autonomous communities individually and provided they meet the deficit target and the corresponding recovery plan.

This would be a personal guarantee, conditional and voluntary, which should be specifically requested by a community and to be granted for specific purposes on condition that the community complies with the deficit.

Regional Governments Press for Hispanbonos

The clear gist is regional governments are in severe trouble, probably much worse than reported.

and sudden stop hits Spain.....

http://www.acting-man.com/?p=17222

Spain – Everything Suddenly Stops

May 31, 2012 |

Retail Sales in Spain Plunge

Economic data releases from Spain have one thing in common lately: they are all 'worse than expected'. Even data that were in fact expected to be atrocious surprise by being more atrocious than previously imagined. The latest example is the reported decline in retail sales of 9.8% year-on-year, a new record. In fact, this was the 'seasonally adjusted' decline. In real terms, retail sales plummeted by 11.3% year-on-year. This follows on the heels of a 3.8% (s.a.), resp. 4% (real) decline last month, which was already quite bad, but not really alarming just yet.

A friend remarked to us that when looking over Spain's economic data releases during April and May, one had the impression that everything had 'suddenly stopped'. This was buttressed by a table depicting said releases:

A selection of important economic data releases from Spain for April and May (mortgage loan growth is for March) – click chart for better resolution.

We remarked to this point that the phenomenon is one we have observed several times in the past. Yes, recessions are always foreshadowed by leading indicators, which range from yield curve inversions to weakening PMI data to falling stock markets. However, the moment when it becomes unequivocally clear to everyone that the recession is here and that it is of the full-blown variety is invariably described as akin to 'someone throwing a light switch'. Suddenly sales shrink rapidly, order books dry up, tight credit becomes even tighter. The economy often seems to stumble from mild weakness into full-blown recession from one month to the next.

We suspect that this has probably psychological reasons: it is akin to a 'third wave' decline in a financial market – also known as the 'recognition point' – the time when the majority of actors in the economy (or market participants in the case of a financial market) realizes that the weakness that up to that point could still be hoped to be temporary is probably far worse than thought and that they better batten down the hatches. This could be triggered by a confluence of events, or simply by the fact that those who either fear a dramatic worsening of the situation or experience it already personally reach a critical mass.

There is of course nothing inherently 'bad' about that. A credit expansion-led boom like the one Spain went through produces the bulk of the losses that will later be realized already while the good times appear to still be rolling.

One must remember here that artificially loose credit will lead to capital malinvestment and ultimately capital consumption, which can for a long time be masked by what will later turn out to have been entirely illusory accounting profits.

So the 'recognition phase' is actually the period when all and sundry become aware of this reality. The time when recession actually strikes is coincident with the beginning of the economy's healing process, if only it is left to its own devices that is. The only way to hasten the process is to remove all obstacles that stand in the way of the necessary adjustments and hinder recovery. There is – and this is an important point that can not be stressed often enough – no way to 'avert' the losses commonly associated with the downturn. One can delay, extend and pretend, engender fresh capital malinvestment and so forth, all measures that will on the surface appear to ease the pain, but ultimately malinvested capital has to be liquidated or where this is possible repriced and transferred to new uses that are profitable. This takes time and is accompanied by the usual recessionary backdrop of rising unemployment, falling prices and wages, contracting sales, and so forth.

Of course we observe what is now happening in Spain's economy with a sense of foreboding, not least because the data suggest that all the deficit projections and targets issued by the government and the EU will have to be revised considerably and that this is a process that may still be in its infancy. Retail sales are an important datum in this context, due to the value added tax representing a large component of the government's revenues (indirect taxes are about 35% of tax revenue in Spain). As an aside, Spain increased its VAT from 16% to 18% in 2010 and had planned to increase it by a further 2% in 2013 (there is talk that it will bring the increase forward into 2012).

Obviously, with the bond market in panic over the bottomless pit that the Spanish banking system is threatening to become, any reduction in tax revenues is apt to further exacerbate the situation – not least because markets that are already extremely nervous will tend to react badly to any fresh negative evidence that emerges. Also, Spain had to revise it deficit estimate for 2011 for a second time on May 20, from 8.5% to 8.9% – the 8.5% estimate was already a revision from the original 6% estimate. These successive revisions have hit the government's credibility, as they are suspiciously reminiscent of how the Greek crisis began.

Once the revisions of this year's target trickle in, things will be seen in a worse light yet again, not least because the government insisted it would meet them on occasion of publishing the latest 2011 revision. This was of course before the size of the Bankia bailout became known.

Fleecing of Retail Investors Puts Government on the Hook

Speaking of Bankia, Bloomberg reports that Bankia sold over €22 billion in preferred stock (i.e., glorified debt) to its retail customers, a practice that banks pursue all over Europe as their normal funding sources dry up. Retail investors often don't realize what they are getting into, as the banks are not exactly forthcoming regarding the risks involved.

We know via friends that Spain's banks are especially egregious violators of their retail customers' trust, an assertion that the preferred stock sales by Bankia clearly confirm.

In fact, Bankia apparently marketed its preferred shares by falsely stating they were 'as safe as deposits':

“The instruments were marketed as very liquid and as safe as a deposit,” said Herrero, who described issuing the risky securities to individual investors as an “original sin.”

Bankia Chairman Jose Ignacio Goirigolzarri said May 26 that the lender is working on a “solution” to the problem of the preferred shares that may be ready before a shareholder meeting scheduled for June 29.“

This kind of restricts the government's flexibility in dealing with the bank's insolvency, as any attempt to 'bail in' unsecured creditors would have to include the retail holders of Bankia securities. Apparently this is considered politically unpalatable.

„The sale of preferred stock to depositors means that almost the only option for the government now is injecting capital,” said Arturo Bris, a professor of finance at IMD business school in Laussanne, Switzerland. “A writedown of preferred shares placed with depositors would cause a social problem. It’s not really a feasible alternative.”

The government nationalized Bankia on May 9, leading the lender with the biggest Spanish asset base to request 19 billion euros of state backing to clean up bad loans to borrowers such as property developers. That’s on top of the 4.5 billion euros of Bankia preference shares the government has already bought. Spain’s also considering guaranteeing joint regional bond issues with tax revenue, three people familiar with the plans said.

The burden all this puts on Spain pushed the extra yield that investors demand to hold the nation’s 10-year notes instead of benchmark German bunds to a record 5.16 percentage points. Bankia lost 12.5 percent of its value today, bringing its decline this month to 54 percent.

A taxpayer-funded bailout of Bankia would foist losses on a wider portion of society than making individual bondholders, many of them depositors, lose money.”

(emphasis added)

What a fine mess. Other governments in the euro area should pay attention, as banks are doing similar retail deals everywhere. Whether Spain's government can actually swing this bailout without outside help becomes ever more questionable considering the ongoing surge in its bond yields.

Credit Market Charts

Below is our customary update of credit market charts, including the usual suspects: CDS on various sovereign debtors and banks, bond yields, euro basis swaps and a few other charts. Charts and price scales are color coded (readers should keep the different price scales in mind when assessing 4-in-1 charts). Where necessary we have provided a legend for the color coding below the charts. Prices are as of Wednesday's close.

We decided to bring a complete update as there have been big moves in all these markets. It should be noted that CDS have become quite overbought, bonds and stocks look very oversold and lastly there is a record net speculative short position in euro futures. These facts would all argue for an imminent pause in the panic, with some sort of corrective retracement triggered soon (what might provide the trigger is unknowable at this time). However, one must always keep in mind at such junctures that 'oversold conditions' occur also just prior to outright crashes. This possibility, although it usually has a very low probability of eventuating, must be kept in mind whenever a budding panic is underway.

5 year CDS on Portugal, Italy, Greece and Spain – Spain at a new record high of 586 basis points, Italy at 550 basis points very close to its 2011 panic high - click chart for better resolution.

5 year CDS on France, Belgium, Ireland and Japan - click chart for better resolution.

5 year CDS on Bulgaria, Croatia, Hungary and Austria - click chart for better resolution.

5 year CDS on Latvia, Lithuania, Slovenia and Slovakia - click chart for better resolution.

5 year CDS on Romania, Poland, the Ukraine and Estonia - click chart for better resolution.

5 year CDS on Germany (white) , the US (orange) and the Markit SovX index of CDS on 19 Western European sovereigns (yellow) - click chart for better resolution.

5 year CDS on Bahrain, Saudi Arabia, Morocco and Turkey - click chart for better resolution.

Three month, one year, three year and five year euro basis swaps – the bounce is taken back again - click chart for better resolution.

Our proprietary unweighted index of 5 year CDS on eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito) -higher, but not yet a new breakout - click chart for better resolution.

5 year CDS on Bankia's senior debt. Although the market is probably certain it will be bailed out, the bid has come back - click chart for better resolution.

10 year government bond yields of Italy, Greece, Portugal and Spain – an interesting equal opportunity massacre with Portugal a notable exception - click chart for better resolution.

Austria's 10 year government bond yield (green), Ireland's 9 year yield (white), UK gilts (yellow) – [ignore the orange line, this is an incorrect quote – we still have been unable to exorcise this particular Gremlin] – the perceived 'safe havens' get all the money that is fleeing from the periphery. Compared to November, Austria is now uncommonly lucky. However, both Austrian and German CDS spreads tell us that all is not OK - click chart for better resolution.

Addendum 1: CDS versus Bond Yields

Alphaville discusses a recent Nomura research report on German Bund yields and why they could go much lower than anyone thinks possible. The decisive passage is this one:

“In essence, as fears of a EUR break-up grow, we think Bunds would essentially have an embedded FX option that diminishes the relevance of yield levels to domestic (and international) investors.”

So the expectation of a post-euro new Deutsche Mark's strength is what partly makes investors ignore extremely low and even negative yields at the short end of the curve. This is not an unreasonable idea. As to why CDS spreads on German debt have risen anyway, they do not contain the embedded foreign exchange appreciation option and are thus a pure play on creditworthiness:

“In essence, because a euro break-up would likely see an appreciating Deutschmark, assets in other countries own by Germans would decrease in value. It works the other way around for foreigners wanting to store their assets in Germany.

Although when you think about it (particularly the part about costly German bank rescues…) it’s a mixed message for German credit. As Nomura write, ‘if Germany leaves the EUR we think Bunds are a sell – but the embedded FX option allows time.’

So it’s interesting that Nomura suggests hedging by buying German CDS, as a purer play on German creditworthiness, because it doesn’t incorporate the FX option, home bias, collateral issues, or the risks (we’ll get to those in a minute). Indeed, while yields have fallen, CDS spreads have increased throughout.

But there’s still what Nomura call ‘the greatest risk to Bunds’, ECB announcement of quantitative easing or mass asset purchases to fix the crisis. ”

Whether such an ECB announcement will ever come remains to be seen of course. Not if Germany has anything to say about it. In fact, we doubt 'QE' could be done without altering the ECB's statutes.

A similar effect (falling yields versus rising CDS) may be at work in Japan as it were. It will be interesting to see what happens if the BoJ ever becomes serious about inflating all out.

Addendum 2: Greek Banks Get Their €18 billion in Recap Funding

The largest Greek banks can now return to the ECB's trough until their latest collateral injection is used up too; readers may recall that this was announced last week already, but in the meantime it has actually been effected:

“Greece handed 18 billion euros (14.39 billion pounds) to its four biggest banks on Monday, the finance ministry said, allowing the stricken lenders to regain access to European Central Bank funding.

The long-awaited injection – via bonds from the European Financial Stability Facility rescue fund – will boost the nearly depleted capital base of National Bank, Alpha, Eurobank and Piraeus Bank.

"The bridge recapitalization of the four largest Greek banks was completed today with the transfer of funds of 18 billion Euros from the Hellenic Financial Stability Fund (HFSF)," the finance ministry said in a statement.

"This capital injection restores the capital adequacy level of these banks and ensures their access to the provision of liquidity funding from the European Central Bank and the Eurosystem. The banks have now sufficient financial resources in support of the real economy."

The finance ministry statement confirmed what an official at the HFSF had earlier told Reuters. The HFSF was set up to funnel funds from Greece's bailout programme to recapitalise its tottering banks. The HFSF allocated 6.9 billion euros to National Bank, 1.9 billion to Alpha, 4.2 billion to Eurobank and 5 billion to Piraeus. All four are scheduled to report first-quarter earnings this week.

The news came as two government officials told Reuters that near-bankrupt Greece could access 3 billion euros, left from its first bailout programme, to cover basic state payments if efforts to revive falling tax revenue fail.”

(emphasis added)

Prediction (an easy one…): not a single cent will reach Greece's 'real economy'. Otherwise, consider the can kicked down the road a little further – until June 17^th or thereabouts (the date of the next election).

Addendum 3:

Regarding Spain's latest retail sales number, we have been apprised that it may be especially bad due to a seasonality quirk, namely the timing of the Easter holidays last year and this year. Even so, it is an especially weak number (seasonal distortions can probably only explain part of the outsized move). However, next month's sales data will likely provide a more reliable figure.

http://www.zerohedge.com/news/be-afaird-europe-be-very-afraid-tim-geithner-now-helping-you

Be Afraid Europe, Be Very Afraid - Tim Geithner Is Now "Helping" You

Submitted by Tyler Durden on 05/31/2012 17:51 -0400

European Central Bank

fixed

Global Economy

New York Fed

recovery

Tim Geithner

If there was one piece of news that could force an all out panic in a market already on the edge, it is that outgoing (as in finally departing) US Treasury Secretary, Tim Geithner, was getting involved in the European Crisis. Sadly, this is precisely what happened.

SPAIN DEPUTY PM: US TREASURY'S GEITHNER AGREES TO WORK WITH SPAIN TO RESOLVE BANK CRISIS - DJ
SAENZ DE SANTAMARIA SAYS GEITHNER URGES SPAIN BANK SOLUTION
- SPAIN'S SAENZ DE SANTAMARIA TOLD GEITHNER OF REFORM EFFORTS
- GEITHNER DISCUSSED SPAIN'S PLANS TO STRENGTHEN FINANCE SECTOR
- SPAIN'S SAENZ DE SANTAMARIA TOLD GEITHNER OF REFORM EFFORTS
More from Bloomberg:

U.S. Treasury Secretary Timothy F. Geithner, Spain’s deputy prime minister, Soraya Saenz de Santamaria, met to discuss Spain’s plans to bolster banking system. The Pair discussed progress Spain made on fiscal, structural reforms, Spanish govt’s plans to strengthen financial sector and support recovery and job creation, and broader challenges facing Europe, global economy, Treasury says in e-mail. The meeting was held at Treasury Dept.

Sorry, Europe, you are now doomed.

Then again, Geithner's involvement may have a silver lining. Recall that the last time Geithner appeared on the European scene in September 2011, everyone's utmost hatred of the American was channeled into a reconciliation of differences, and led Europe to set off on a path that led to the LTRO and at least fooling some of the C-grade commentariat that Europe was fixed.

From September 15:

Europe Tells Geithner To Take His Advice And Shove It

Just because it is not enough for Tim Geithner to be mocked, ridiculed and generally despised on one continent, the former New York Fed "Hudsucker Proxy-style" plant has just managed to become the most despised individual on at least one more continent. Bloomberg reports that European Central Bank Executive Board member Juergen Stark said countries offering advice on how Europe should solve its debt crisis should put their own fiscal situation in order first. "Finger-pointing in the direction of Europe shouldn’t prevent others from putting their budgets in order and doing their homework before handing out advice to Europeans," Stark said at an event in Vienna. This probably means it is safe to assume that the ECB, after listening to the human caricature of Beavis twice in a row on implementing totally failed stress tests, will not take up Timmy on his latest proposal of how Europe should fix itself. It is also safe to say that Europe just have a perfect example of how one should shut up a corrupt, incompetent, cheating, printer of virtually infinite one-ply US debt.

and......

http://www.zerohedge.com/news/imf-begins-spains-schrodinger-bail-out

IMF Begins Spain's Schrodinger Bail Out
Submitted by Tyler Durden on 05/31/2012 12:38 -0400
Update: as expected, "IMF Says Spain Discussions Internal, No Talks With Spain"

Wondering what prompted the most recent "month end mark up" ramp in stocks? Look no further than the IMF, which one month after failing miserably to procure a much needed targeted amount of European bailout funds as part of Lagarde's whirlwind panhandling tour, hopes that markets are truly made up of idiots who have no idea how to use google and look up events that happened 4 weeks ago. So here it is: the Spanish bail out courtesy of the IMF. Well, not really. Because according to other headlines the IMF claims no plans are being drafted for a bailout. Why? Simple -if the IMF admits it is even considering a bailout, it will launch a bank run that will make the Bankia one seem like child's play, as the cat will truly be out of the bag. So instead it has no choice, but to wink wink at markets telling them even though it has been locked out from additional funding by the US, UK, Canada and even China, it still has access to funding from... Spain.
From the WSJ:

The European department of the International Monetary Fund has started initial discussions on a contingency plan for a rescue loan to Spain in case the country fails to find the funds needed to bail out its third-largest bank by assets, Bankia, people involved in the handling of the Spanish crisis said.

Both the European Union and IMF want to avoid having to bail out Spain at all costs, the people said, but early planning is under way given that the country is struggling to raise a €10 billion ($12.4 billion) shortfall in funds to bail out Bankia.

The stakes are extremely high because a three-year rescue loan for Spain could be as much as €300 billion, one person said, although any bailout could involve smaller, shorter-term loans.

That's ok IMF: let's play your game. You are bailing out Spain's banks? Fine. Here, as posted yesterday, is the list of banks that now officially, per Goldman, need a bailout:

Spain: Bankia Down, Who Is Next?

Bankia is done: at this point the only questions left are i) what will be the final bailout cost ii) who will pay for these costs, and iii) whether the bank has enough beach towels to satisfy the onslaught of manic Spaniards desperate to hand over their €300 euros to the insolvent bank in exchange for some Spiderman-embossed linen. Oh, there is one more question: who is next.

Now, as we showed earlier today, in the aggregate the answer is simple: everyone.Because as JPM said "if a Spanish EU/IMF bailout package covered the government’s gross funding needs through the end of 2014, and included €75bn for bank recapitalisation, then it would amount to around €350bn." At roughly a third of its GDP, this is, needless to say, more money than Spain can procure. But, in a very Stalinesque sense, where everyone is merely a statistic, that is essentially the same as saying no one. It is also certainly not helpful to any Spanish readers who may be worried about their deposits (and investments) which in a world of total disinformation, will first be lost before the government advises caution and safety. So instead we go to Goldman Sachs which has conveniently constructed the following analysis, which replicated the loss provision calculation of Bankia, and applies it to the other listed banks. The result: in addition to the €19 billion in bail out costs for Bankia,Spain will need to spend at least another €25 in bailout funding for six other listed banks which include CaixaBank SA, Banco Santander, Banco Popular Espanol, BBVA, Banco Espanol de Credito SA, Bankinter SA.

So now we are not dealing with mere "statistics."

The capital need breakdown is as follows: "Pro-forma capital gap assuming 9.5% CT1 hurdle rate, loss estimates comparable
to those outlined by BKIA and front-loaded in 1H12"

And in the grand scheme of things:

and......

http://www.zerohedge.com/news/spanish-cds-over-600bps-sends-sp-futures-under-1300

Spanish CDS Over 600bps Sends S&P Under 1300
Submitted by Tyler Durden on 05/31/2012 10:57 -0400
There is little doubt what the world's pivot security is for now - Spanish sovereign debt. 5Y Spanish CDS just broke above 600bps for the first time ever and S&P 500 e-mini futures reacted by breaking below 1300. Lots of moving parts in Europe's sovereign markets - Spanish bonds were modestly bid today even as CDS was gapping wider - but if one steps back and looks at the basis (the spread between bonds and CDS) this makes sense as it had reached almost 100bps offering basis traders the opportunity to buy bonds and buy protection. We suspect few are outright shorting Spanish bonds here now and the marginal offer is a long-seller but with basis traders still active, do not focus entirely on bonds as evidence of anything until the basis contracts.
European Sovereign CDS...

European Sovereign CDS-Cash Basis...

note the bounce in Spain's basis today (light blue line -red oval)

Finally recall what we warned, citing Citi,two weeks ago:

"Our impression is that markets will need to act as the proverbial 'attack dog', forcing the issue on the political agenda. We can't escape the sense that it is probably politically easier to let the markets run loose for the time being to make it apparent that further intervention is needed. But 1000bp on Crossover is much closer than you imagine." In other words, Citi just gave the green light for the bottom to fall from the market just so Europe's increasingly impotent political elite does something, anything. Look for many more banks to sign off on the same letter.

We still have a way to go...

Facebook now at a $26 handle...9 days after reaching $45 on the IPO release...

Average:

Catharsis Ours

Thursday, May 31, 2012