Items of interest pertaining to Italy and Spain - troubles not just found in Greece as far as Europe goes ....

http://ftalphaville.ft.com/blog/2012/05/15/996821/the-foreign-law-distinction-encore/
( Greek PSI and foreign law distinction will have an effect on all sovereigns going through the inevitable restructuring process )

The foreign-law distinction, encore

Posted by Joseph Cotterill on May 15 17:49.

Holding foreign-law bonds in preference to domestic-law in peripheral eurozone sovereigns: such a cliché now, they built the Greek PSI around it.

It also made it possible (though it alone did not make it probable) for holdouts in the €435m May 2012 floating-rate note to get paid out in full on Wednesday.

Only about €15m from the original €450m issue was tendered into the PSI. Since then, Greece had been trying to reach a deal (which would have been below the bond’s par value clearly) with ‘private banks and a US-based hedge fund’, according to the FT.

Here’s the justification of payment at par from the Greek finance ministry, which we think darkens more than it illuminates:

The decision weighed carefully all relevant factors and implications as well as the current conjuncture. Today’s decision does not prejudice future decisions on the treatment of the remaining bonds not tendered in the PSI exchange.

Will it not? If the argument is that Greece didn’t need another negative shock at this time, we wait for the day when Greece won’t be vulnerable to negative shocks. Plus, party leaders seemed to be weighing things less than carefully as late as Sunday.

You could also wonder about negative political shocks from the Greek household wealth hit by the PSI write-downs, or which could have received the resources that have gone into paying this bond. Difficult choice.

Still, the foreign-law distinction is also at the heart of why this bond was paid back.

Not only was the bond issued under English law — i.e. the Greek government couldn’t legislate changes to it — but the “savings” to Greece from not paying out the bond fell once it made much greater savings from being able to legislatively assist restructuring of the Greek-law debt stock.

In connection with the above, it’s worth noting this: while the New Greek bonds were smashed on Wednesday (the 2023 bond, the earliest-maturing, is close to a 30 per cent yield) these are still English-law.

So it’s worth checking in again on how the foreign-law premium might work in other sovereigns. Portugal’s the obvious one here. Though these comments from Rabobank analysts last week are among the first we’ve seen to take a systematic view of foreign-law bonds in Spain:

Detailed information on covenants is rather scarce and additional information is difficult to obtain as we try to zoom in on Spain. We have gathered excerpts from some international bond prospectuses and they confirm that, indeed, all international bonds are subject to English law and that a 75% threshold is required to change (reduce) the notional, i.e. force all other participants to restructure debt. Below we show an excerpt from a prospectus on the in dollar dominated bond with maturity 06/17/2013 (highlights added by us)

“The Trust Deed contains provisions for convening meetings of the holders of the Notes to consider any matter affecting their interests, including the modification of the Notes, the Receipts, the Coupons or the provisions of the Trust Deed. An Extraordinary Resolution to approve a Reserved Matter (as defined below) at a meeting of the holders of the Notes shall require the approval of holders of at least 75 per cent….. ‘‘Reserved Matters’’ means any proposal to (a) postpone the date of maturity of any of the Notes or any date for payment of interest thereon, (b) reduce or cancel the nominal amount of the Notes, (c) reduce the rate of interest payable in respect of the Notes, (d) vary the currency or place of payment in which any payment in respect of the Notes is to be made, (e) amend the status of Notes under Condition 3, (f) amend the obligation of the Issuer to pay additional amounts under Condition 7 and the Trust Deed, (g) amend the Events of Default set out in Condition 8, (h) amend the law governing the Notes and the Trust Deed referred to in Condition 18, (i) modify the provisions contained in Schedule 3 to the Trust Deed 38”.

Sign of the times no doubt. Though Rabobank point out that Spanish foreign-law paper were protected from the dive in the domestic-law late last year, only to get caught out by the subsequent LTRO rally in the latter. And with €4.87bn in issue the international bonds are a pretty small lifeboat compared to the domestic debt size:

That’s only a bit more than the Portuguese international bonds in issue.

and.....

http://globaleconomicanalysis.blogspot.com/2012/05/spain-potpourri-official-denials-from_15.html

Spain Potpourri: Official Denials From Finance Minister; More Nationalizations Coming Up; Banks Use ECB Money to Refinance Large Enterprises in Dire Shape, New Credit To Households Down 80%

Official Denials From Finance Minister

Finance Minister Says "Nothing to Hide" Asks for ECB Audit of Banks, Denies Need for Rescue Fund

 The Economy Minister Luis de Guindos, said Tuesday it has asked the European Central Bank (ECB) to assist in the independent audit of the Spanish banks' balance sheets and is committed to full throttle work as has asked the Eurogroup, in order to have results within two months.

In addition Guindos assured that no minister of economy of the eurozone has said that Spain should come to the rescue fund EU to recapitalize their banks.

"There is nothing to hide, believe that the reform we are doing is a reform that clarifies and introduces transparency and clarity in balance sheets and the Spanish government has a will very clear about it," stressed the Minister of Economy.

"Nobody has spoken at all to go to the bailout fund, is a matter of speed independent valuations," has settled the finance minister when asked about whether Spain would seek assistance from the EU to help banks unable to meet the requirements of provisions providing for the reform.

Another 30 Billion Euros Needed, More Nationalizations Coming Up 

Banks that do not return the aid within 5 years will be nationalized

 The State nationalize financial institutions that do not return within five years aid articulated through convertible bonds, the so-called 'coconuts', designed to 'clean up' their balance sheets of real estate assets.

This is particular the Legislative Decree on Saturday published the Official Gazette (BOE), which requires banks additional sanitation EUR 30,000 million credit-linked unproblematic 'brick'.

After this period, the Bank Restructuring Fund (FROB), through which the state sanctions the 'coconut', have a maximum of six months to implement in practice what would be nationalization of the entity.

However, the rule empowers the Bank of Spain to proceed with the conversion of shares before those five years when it considers "unlikely" that a particular bank can afford to pay for this help.

And if the entity defaults on the repayment of the aid, the regulator may also temporarily replace the administrative or management of the entity, which would eventually assuming his speech.

Spanish banks must set aside another 30,000 million for provisioning loans to real estate developer and healthy yet recorded incidents of payment.

Collapse in Credit

Banks Use ECB Money to Refinance Large Enterprises, New Credit To Households Down 80%

 Loans from the European Central Bank (ECB) for Spanish banks are finally beginning to be seen in the figures for new credit. After many months of fall shows signs of stabilization and down only 1.5%. However, the news is not as good as it seems.

If we analyze the data by sector we find that the money has not been evenly distributed, but for families and small business loan new credit falls with increasing strength while for the general business credit do you see a recovery (+8.9% compared to March 2011). These loans are likely to mostly be treated refinancing to large companies in dire financial shape, given the terrible sales data that are being seen in recent months.In the first graph we see the evolution of total credit, which appears to show signs of stabilization, at present, about 50,000 million / month, less than half that seen at the peak of the bubble. We can also see the credit business, which also stabilizes over 45,000 million / month, less than 60% of what was in 2007, and the family is declining and is already below the 6,000 million / month, less than a quarter of what had in 2007.

click on chart for sharper image

The following graph we can see the evolution of new credit to households, broken down into housing, which fell by 21.7% compared to March 2011 (down nearly 80% from maximum), consumption, whose rate of decline increases to 10 , 2% (also down almost 80% from maximum), and other purposes, which drops to 9.8% (almost 70% from maximum). Families, therefore, despite the extraordinary liquidity injections to three years of the ECB (LTROs) were the tap is closing more and more credit.

click on chart for sharper image

The situation for the small business credit, which is what you see in the chart below, is very similar. Increases its rate of decline to 14.8% and down almost 60% from highs. However, the situation for the great credit business is very different. Increases by 8.9% over March 2011 and down only just over 36% from highs.

There is no doubt that banks are giving priority to these large companies, which not only get much more credit than all other sectors combined (despite employing only a third of private sector employees) but also , are increasing their participation in the growing pie, as they have gone to get before the crisis over 40% of loans over 60% right now.

click on chart for sharper image

The privileges of these big companies do not end here, since the conditions are also radically different for large and small loan. If before the crisis the difference used to be 100 basis points (bp), 1% or so, now the widening and extending more and reaches the 266 bp (2.66%).

Everything indicates that Spain is moving increasingly in the Anglo-Saxons called crony capitalism , but as an Iberian, ie banks that also pays to be the handouts to their favorites regardless of purely commercial factors. This can only affect an increasingly inefficient allocation of resources and a poorer functioning of markets, which will only further reduce the resilience of our economy in a globalized world increasingly difficult.

Ponzi Financing

Those charts show the Spain is banking system is in deep, deep trouble in spite of official denials from the finance minister.

Ponzi financing of the largest enterprises is the name of the game and the bond market has zeroed in on it. Yield on the 10-year bond has soared to 6.35%. I expect back above 7% soon.

and....

http://www.telegraph.co.uk/finance/financialcrisis/9268330/Italys-banks-shaken-as-economic-slump-deepens.html

By Ambrose Evans-Pritchard, International business editor

9:10PM BST 15 May 2012

61 Comments

With the world's third largest debt after the US and Japan at €1.9 trillion (£1.18 trillion), it is big enough to bring the global financial system to its knees. It is also in the front line of contagion as the Greek crisis metastasizes.

Yields on 10-year Italian debt jumped 16 points to 5.86pc on Tuesday after Italy's data agency said the country is sliding even into deeper recession, with GDP shrinking 0.8pc in the first quarter.

Output is now 6pc below its peak in 2008. Italy has been trapped in perma-slump for a decade, the only major state to suffer a fall in real per capita income since 2000.

Rising anger has led to a spate of violent attacks by terrorist groups over recent weeks, all too like the traumatic 'years of lead' in the late 1970s. The government is mulling use of troops to protect targets after anarchists shot the head of Ansaldo Nucleare last week and hurled petrol bombs at tax offices.

The unelected government of Mario Monti is carrying out net fiscal tightening of 3.5pc of GDP this year even though Italy's budget is near primary surplus. This is three times the International Monetary Fund's "therapeutic" pace. All key measures of Italy's money supply have been contracting at 1930s rates over the last six months.

Hans Redeker from Morgan Stanley said the EU's mishandling of Greece has put Italy in grave danger. "The irrevocability of the eurozone is a valuable asset, and they are throwing it away. Global investors are preparing for the day Greece leaves," he said.

The IMF said Italian bank exposure to the state is 32pc of GDP, including all forms of lending. "We are looking at this number very closely," said Mr Redeker. Almost half of this is owed to foreigners. Italy's central bank owes a further €278bn in 'Target2' claims to peers in Germany, Holland, Finland and Luxembourg, reflecting capital flight.

Italy's former premier Romano Prodi said the EU risks instant contagion to Spain, Italy, and France if Greece leaves. "The whole house of cards will come down", he said

Angelo Drusiani from Banca Albertini said the only way to avert catstrophe is to convert the European Central Bank into a lender of last resort. Otherwise Italy faces "massive devaluation, three to five years of hyperinflation, and unbearable unemployment."

The ECB's emergency lending may have made matters worse, encouraging banks to buy their own states' debt. It has led to an incestous inter-linkange of fragile banking systems and fragile sovereign states, each propping the other up. Many of the banks used ECB money to buy state bonds until they need to roll over their own debt. They are now nursing stiff losses.

Moody's downgraded 26 Italian lenders on Monday night saying the slump itself is the killer, joining a chorus of voices warning that too much austerity may be self-defeating. "Banks are vulnerable to the renewed recession in Italy, given their already elevated levels of problem loans and weakened profitability," it said. Moody's expects the economy to contract 1.9pc this year.

The Italian Banking Association ABI accused Moody's of an "irresponsible, incomprehensible, and unjustifiable" smear. "Moody's decision is an attack on Italy, its companies, its families and its citizens," it said, calling on the EU authorities to clamp down "severely" on rating agencies.

The agency said the "problem loans" of Italian banks have reached 9.3pc. The figure may be higher, given "concerns about the accuracy of reported non-performing loan measures." They depend on capital markets for 36pc of their funds. This source of finance has largely dried up.

and....

http://www.guardian.co.uk/business/2012/may/15/eurozone-crisis-gdp-greek-government-talks

4.05pm: The eurozone crisis continues to bubble away in Italy, where construction firms are today threatening to sue the Italian authorities unless they are paid on time.

Tom Kington reports:

Since the downturn began in 2008, 7,750 firms have gone under, with the loss of 380,000 jobs, the building sector association president said on Tuesday.

But while the recession is crippling the business, the late paying government is making matters worse, he said, with companies now waiting from nine months to two years to be paid for public contracts.

Ten days after asking firms to send in their unpaid bills, the association has totalled one billion euros and claims the final tally for the industry will be 19 billion.

"Ministers have talked of offering government bond instead of cash, but we need liquidity," said an association spokeswoman. "So we are proposing the banks offer to pay with the government then repaying the banks."

The next bad news for the sector arrives this summer with the introduction of a dreaded new property tax to replace the one scrapped by Silvio Berlusconi in 2008 which could prompt a fall in house prices by year end.

3.03pm: While Greece's politicians were failing to agree a deal, Italians have been raging against credit rating agency Moody's for downgrading 26 Italian banks last night.

From Rome, Tom Kington reports:

Italians have never liked being judged by ratings agencies and Pierferdinando Casini – leader of the centrist UDC party –proved no exception on Tuesday when he called Moody's decision "a criminal plan against Italy and Europe".

Casini – one of three key party leaders backing Mario Monti's technical government -- was echoing the outrage of Italy's banking association, which called the move "an aggression against Italy, its companies, families and citizens."

Italy's business association Confindustria called the move "an attack on Italy", while the country's anti trust chief said the use of ratings should be restricted and Luigi Abete, chairman of BNL, called for the decision to be viewed "with a huge pinch of salt."

The banking association made the point that Moody's had cited the negative impact of Mario Monti's austerity measures on the economy as a reason for the downgrades after previously calling for those measures to be introduced.

The furious reaction follows the opening of a probe by Italian magistrates last year into Moody's, Standard & Poor's and Fitch for possible market rigging. Showing they meant business, investigators last August duly raided the Milan offices of Moody's and Standard & Poor's.

12.24pm: My colleague Giles Tremlett gets in touch from Madrid with an update on the latest developments in Spain, another key part of the eurozone crisis:

While Spanish banks dominate the headlines, this is also a key week for sorting out what markets see as the country's other major headache (barring, of course, massive unemployment and recession) – which are the budgets of the regional governments.

Spain missed its 6% deficit target spectacularly last year, hitting 8.5% instead. This is precisely because of the regions - which run health and education and, so, do much of Spain's public spending. The two biggest regions, Catalonia and Andalucia are presenting budget plans today.

Catalonia has just announced the privatisation of motorways and water companies, as well as a fire sale of public property. Andalucia is expected to cut civil service pay.

On Thursday all the regions meet with budget minister Cristobal Montoro to have their budgets approved (or not).

10.53am: Spain (anothe country in recession) is increasingly sending out SOS messages to its eurozone partners.

My colleague Giles Tremlett reports from Madrid:

Finance minister Luis de Guindos has today suggested the European Central Bank should help with the two valuations of total bank assets that Spain's government is to commission from independent valuers. Fellow eurozone ministers are pressing for Spain to complete the valuations quickly, but the task is huge. De Guindos says they will try to get it done in two months.

Spain's conservative People's party government, ideologically aligned with Angela Merkel, went into the eurogroup meeting claiming it is doing all it can to sort out banks and deficit-spending, while pushing ahead with key labour market and budget reforms.

If that is not enough to stop bond yields soaring (and yesterday they reached their highest level since the nerve-shattering month of November, with the interest on ten year bonds closing at over 6.2 percent), then the eurozone must react as a whole, De Guindos said. "What we need now is cooperation from the eurozone and a joint reply," (to market pressures) he said.