http://www.zerohedge.com/news/spain-and-citi-here-what-happens-next-country-all-pain
Submitted by Tyler Durden on 06/22/2012 13:39 -0400
http://globaleconomicanalysis.blogspot.com/2012/06/laugh-of-day-stress-tests-spanish-banks.html
It's more like lie of the day than laugh of the day as Madrid moves to ease bailout fears
Allegedly the three largest banks, created by mergers of smaller insolvent banks do not need any capital at all even though Spain asked for €100 billion and Citigroup thinks the banks need €350 billion.
For the past few days, yields in Spain have plunged from 7.28% down to 6.4% on a packet of lies and junk. It won't last, not that 6.4% is remotely sustainable in the first place.
Credit Risk
Meanwhile, yield on the 10-year German bond is creeping up.
Why shouldn't yields on German bonds rise? Every step by the ECB to add leverage or accept lower rated securities as collateral puts more credit risk on Germany.
For a discussion of credit risk, please see ...
The only realistic way yields can fall in Italy and Spain is if they rise in Germany.
Meanwhile, please recall that on Tuesday we saw this announcement Spanish Banking Audits Delayed Until September, Another €50 Billion Likely Needed.
Submitted by Tyler Durden on 06/22/2012 11:14 -0400
Submitted by Tyler Durden on 06/22/2012 10:30 -0400
and....
http://globaleconomicanalysis.blogspot.com/2012/06/italy-gasping-like-beached-whale.html
Please consider The Taboo of the Euro on Beppe Grillo's Blog.
Outside Italy, very little attention has been given to Beppe Grillo and his Five Star Movement. Yet the Five Star Party is now the second largest party in Italy.
PDL, is now the third largest party and Berlusconi is now anti-euro, as is the Northern League. These are very significant events.
For more details, please see Six Reasons Why Italy May Exit the Euro Before Spain; Ultimate Occupy Movement.
Also note Monti Begs Germany to Stabilize Interest Rates; Merkel Pours Cold Water On "Theoretical Discussions"; Italy Official Denial #1; Why Monti's Days Are Numbered. “See you in the next Parliament” Beppe Grillo said after the local elections in May. I repeat my position: Let's hope so.
and....
http://www.telegraph.co.uk/finance/financialcrisis/9350519/Debt-crisis-Greek-governments-leaders-fall-ill-on-first-day.html
and.....
http://www.telegraph.co.uk/finance/financialcrisis/9350346/Debt-crisis-Angela-Merkel-defies-Latin-Europe-and-the-IMF-on-bond-rescue.html
Spain And The Citi: Here Is What Happens Next In The Country With All The Pain
While this morning saw a rumor of junior bank bondholder haircuts (and burden-sharing) rapidly denied by Spain's de Guindos, it appears the country's smarter individuals are realizing that perhaps a 'bail-in' (a la Citigroup in 2009) is the better way to go than an unending 'bailout' when it comes to the problem banking system. As the WSJ noted last week "consider the grim fact that even €100 billion may not be enough to put Spain's banks back on their feet, as they could easily face losses of perhaps three times that amount" confirmed in yesterday's Oliver Wyman reality check.
The bigger issue is not the insufficiency of the loan but the fact that such a relatively small loan was impossible for the sovereign to raise itself as no private investors believe their solvency - implying Spain has reached its debt saturation point. Neither government nor taxpayers can afford to take on more debt (which is what the bailout is).
The solution, a precedent set by the good ol' USofA with the Citi preferreds, is to cram-up bond-holders. A compulsory debt-for-equity swap for the subordinated and senior unsecured liabilities, "whereby investors bear the vast majority of the cost of their own mistakes, without liquidating the banks and without pushing the Spanish economy into bankruptcy" may initially cause some turmoil in the interbank lending markets (which would need to be supported by the ECB in the interim as it is already) may be extremely painful for shareholders (who will see massive dilution) and bondholders (arguably rightfully so) but would offer hope for improving market belief in solvency.
A Senior-Subordinated spread decompression trade in credit would seem to make sense - given the considerable hit taken to the subordinated class (whether it triggered CDS or not) and sets up to be themacro trade for the coming months.
especially given the following 'math' from the WSJ's story:
Converting into equity 100% of the €88 billion of subordinated liabilities, and 40% of the €160 billion of senior unsecured debt, would generate more than €150 billion of loss-absorbing equity for the Spanish banking system. Together with the estimated €25 billion in expected operating profits for 2012, before loss provisions, that would yield about €175 billion in new bank equity, without increasing the debt burden of the Spanish taxpayer or requiring a loan from Brussels.
Many investors would no doubt complain about the rough justice of a regulator-imposed reorganisation. To preserve value, officials would have to move very, very quickly, leaving little time to fine-tune various claims or observe normal procedures. The new structure would be based on bankruptcy reorganisation principles, allocating value in accordance with investors’ seniority and ensuring that each class of investors would be better off than in liquidation.The process would not be pretty but overall, investors should be relieved by the result.Why can’t the bankruptcy code do this today? To an insolvency professional, this restructuring looks somewhat like a “prepackaged” bankruptcy, in which creditors agree to a new, less leveraged capital structure negotiated over a period of months. But a lengthy, voluntary process is impractical in the panic surrounding the failure of a very large, complex financial institution.
As Juan Ramon Rallo notes in the WSJ article last week:Instead of a bailout, the Spanish state should force a "bail-in," in which much of the banks' debt is converted to equity. This would reduce the banks' leverage and increase the capital available to absorb the coming losses... and after some time, short-term credit would flow again inside a country with much more robust and solvent financial institutions.Perhaps the 'bail-in' is best summarised by a comment from the WSJ story:Essentially, this is a proposal for financial restructuring (aka bankruptcy) without bothering to go to the courts. Its cleaner, less disruptive, and less expensive than where we are headed otherwise. The money has already been lost. Someone has to book it.
Seriously, when should investors in the debt of financial entities take a loss if not now? Never?
and.......
Laugh of the Day: Stress Tests Show Spanish Banks Only Need €16bn and €62bn in New Capital; ECB to Accept ABCP Collateral One Step Above Junk as Collateral
The yield on 10-year Spanish bonds has fallen for the second day in a row, and now sit at 6.4% according to Bloomberg.
Yesterday's news was ECB to relax loan rules for Spanish banks
Yesterday's news was ECB to relax loan rules for Spanish banks
Benoît Cœuré, an ECB executive board member, told the Financial Times in an interview this week: “We certainly have to make sure that sound counterparties have the means to access our liquidity, including in terms of collateral availability.“
He warned that collateral buffers had “become more strained in some places” and added: “There is an ongoing reflection on how to alleviate these tensions.”
However, the debate is sensitive within the ECB council, with many of its members worried about the risks involved and the dangers of substituting actions by governments to strengthen public finances.
The decision on the use of asset-backed securities – bonds backed by loans – was taken separately from the wider review of collateral rules and appears designed to buttress efforts by eurozone authorities to strengthen Spain’s banks. Under the new rules, such securities will be eligible for use as collateral providing they have a credit rating of at least BBB (minus), according to eurozone officials. Previously, the minimum requirement was for at least an A rating.Lie of the Day
In his FT interview, Mr Cœuré warned that changes to the ECB’s collateral rules would “have to come with strict risk control, in particular with haircuts”.
It's more like lie of the day than laugh of the day as Madrid moves to ease bailout fears
Spain has sought to ease investors’ fears that it needs a full-scale international bailout of its economy by publishing two “stress tests” showing that Spanish banks need between €16bn and €62bn in new capital.
The estimates of how much extra capital its banks might need fall well within the sum of up to €100bn that Spain requested for its financial system from its eurozone partners this month.
Fernando Restoy, deputy governor of the Bank of Spain, said the numbers were “a long way from the maximum that the eurogroup agreed to make available to Spain”.Got That?
“The three biggest groups in the country don’t need assistance in the form of new capital, even in the stressed scenario,” he said in a reference to Santander, BBVA and Caixabank.
Allegedly the three largest banks, created by mergers of smaller insolvent banks do not need any capital at all even though Spain asked for €100 billion and Citigroup thinks the banks need €350 billion.
For the past few days, yields in Spain have plunged from 7.28% down to 6.4% on a packet of lies and junk. It won't last, not that 6.4% is remotely sustainable in the first place.
Credit Risk
Meanwhile, yield on the 10-year German bond is creeping up.
Why shouldn't yields on German bonds rise? Every step by the ECB to add leverage or accept lower rated securities as collateral puts more credit risk on Germany.
For a discussion of credit risk, please see ...
- "Germany is a Credit Risk" Says Bill Gross; Germany Exiting Eurozone is One of Very Few Scenarios in Which German Bonds Do Well
- Discussion of Target2 and the ELA (Emergency Liquidity Assistance) program; Reader From Europe Asks "Can You Please Explain Target2?"
The only realistic way yields can fall in Italy and Spain is if they rise in Germany.
Meanwhile, please recall that on Tuesday we saw this announcement Spanish Banking Audits Delayed Until September, Another €50 Billion Likely Needed.
and.....
http://www.zerohedge.com/news/latest-european-bailout-plan-fizzles-record-time
Latest European Bailout Plan Fizzles In Record Time
UPDATE: The Bundesbank, as usual, ready to pur some 'reality-based' cold-water on the situation:
- *BUNDESBANK SAYS IT'S CRITICAL OF ECB COLLATERAL DECISION
- *BUNDESBANK SAYS IT WON'T ACCEPT COLLATERAL IT DOESN'T HAVE TO
They came, they spoke, they spiked EURUSD; but now just over 90 minutes later the full force and furor of the 3 horse-men (and 1 woman) of the Euro-zone have tried and failed to get any market belief in their constant tirade of the same facts and denials. No matter what Monti, Hollande, and Rajoy say, Merkel's reply summarizes to: "No Free Lunch" and while markets exhibit their 'spasmodic' response function to any comment from Europe, sooner now (rather than later) we revert to pre-bullshit levels. As a reminder, the half-life of the Spanish Bailout was 7 hours as we noted here which must make this total reversion particularly worrying for the 'elite'.
Merkel Reminds Europe Of The Golden Rule
After a series of idiotic pleadings by Europe's broke insolvent countries that everything is now all fixed, Merkel decided to put some order into the house and reminder everyone who actually still has money:
- MERKEL SAYS DIRECT BAILOUT FUNDING OF BANKS VIOLATES TREATIES
- MERKEL SAYS GERMAN TAXPAYERS WANT GUARANTEE ON HOW AID SPENT
Which is funny: because the Golden Rule is that he who has the gold, makes the rules. And the rule is, and has always been, that the "guarantee" for further bailouts will be even more gold. Physical not metaphorical.
http://globaleconomicanalysis.blogspot.com/2012/06/italy-gasping-like-beached-whale.html
Friday, June 22, 2012 4:17 PM
Italy "Gasping Like Beached Whale"; Berlusconi Reiterates Euro Exit "Not Blasphemy"; Beppe Grillo Discusses "Taboo of the Euro"
On June 1, former Italian Prime Minister Silvio Berlusconi said "Italy should dump the euro unless the European Central Bank agreed to inject more cash into the economy". One day later Berlusconi said the idea Italy should dump euro was a "joke".
It was not a joke, except perhaps as quoted. On June 20, Berlusconi says Italy euro exit "not blasphemy"
It was not a joke, except perhaps as quoted. On June 20, Berlusconi says Italy euro exit "not blasphemy"
Italy should consider leaving the euro unless Germany agrees to the European Central Bank acting as a guarantor for sovereign debt and printing money to reflate the economy, former Prime Minister Silvio Berlusconi said on Wednesday.
"Leaving the euro is not a blasphemy," he wrote on his Facebook page.
If Germany does not agree to a new role for the ECB then it should consider leaving the euro itself, Berlusconi said. "I have spoken to some German experts who would be in favor," said Berlusconi, leader of one of two main parties backing pro-European Prime Minister Mario Monti.
The 75-year-old media magnate, whose People of Freedom party (PDL) lost heavily in local elections last month and has been shedding supporters steadily over the last year, is increasingly targeting the euro in a bid to regain popularity.The Taboo of the Euro
With less than a year before the next general election, Italy faces the prospect of at least two large parties running on an anti-euro ticket.
The Five Star Movement led by comedian Beppe Grillo, who urges an exit from the euro, has overtaken the PDL according to recent polls to become Italy's second largest party, with more than 20 percent of voter support.
The pro-devolution Northern League also often expresses skepticism or hostility about the single currency.
Please consider The Taboo of the Euro on Beppe Grillo's Blog.
When the Euro is put under the spotlight, the indignant reaction is a chorus of “We cannot leave the Euro”, as though Europe is identified with the Euro. It’s possible to serenely remain in the EU without having to do without one’s own currency. Of the 27 States making up the EU, ten have kept their currency, including Great Britain, Sweden, Poland, the Czech Republic and Denmark who are not risking any default. Another trick is the repetitive use of the term “single currency”. There’s is absolutely no single European currency. The Euro is limited to 17 States and those who are outside are taking good care not to enter the Euro zone. Who in Europe, is today in crisis? Right at the top are those countries with so-called “weak” economies that adopted the Euro.
To remain in the Euro we are starving the country, strangling the companies, transferring the private wealth to cover the interest payments on the public debt that is (unfortunately) in Euro. If it were in lira we could resolve the problem of the debt with the devaluation of our currency.Five Star Movement
Italy is gasping like a beached whale. If to remain in the Euro and pay the interest on the debt to the banks, mainly German and French, we have to kill the economy of our Country, perhaps it’s appropriate to stop and reflect. Especially if the public debt and the spread are increasing anyway while we are being strangled. The Euro must not be a taboo.
Outside Italy, very little attention has been given to Beppe Grillo and his Five Star Movement. Yet the Five Star Party is now the second largest party in Italy.
PDL, is now the third largest party and Berlusconi is now anti-euro, as is the Northern League. These are very significant events.
For more details, please see Six Reasons Why Italy May Exit the Euro Before Spain; Ultimate Occupy Movement.
Also note Monti Begs Germany to Stabilize Interest Rates; Merkel Pours Cold Water On "Theoretical Discussions"; Italy Official Denial #1; Why Monti's Days Are Numbered. “See you in the next Parliament” Beppe Grillo said after the local elections in May. I repeat my position: Let's hope so.
http://www.telegraph.co.uk/finance/financialcrisis/9350519/Debt-crisis-Greek-governments-leaders-fall-ill-on-first-day.html
Debt crisis: Greek government’s leaders fall ill on first day
Their country is very much the sick man of Europe. So it was sadly symbolic when two of Greece’s top politicians fell ill on the first day of its new government on Friday.
9:22PM BST 22 Jun 2012
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Antonis Samaras, the prime minister who was sworn in on Wednesday, cancelled meetings and will undergo surgery on Saturday after he was found to be suffering from a detached retina following a routine eye examination.
Of greater concern was the condition of the country’s new finance minister, Vassilis Rapanos, who was rushed to hospital after collapsing from apparent exhaustion. Mr Rapanos, 65, who is known to suffer from a long-standing illness, was in a stable condition last night.
The men’s ill health was emblematic of the strain being placed on millions of ordinary Greeks as the eurozone struggles to find a solution to the financial crisis.
On Friday, at a meeting in Rome, Germany resisted calls for a “eurobonds” scheme to share debt between single currency members. Angela Merkel, the German chancellor, said she was only willing to accept such a move if EU rules gave financial backers including Germany more influence over those that receive help.
Mario Monti, the Italian prime minister, said a summit of all 27 EU leaders in Brussels next week would be a “defining moment” as he set out plans to integrate the financial systems of the single currency countries.
http://www.telegraph.co.uk/finance/financialcrisis/9350346/Debt-crisis-Angela-Merkel-defies-Latin-Europe-and-the-IMF-on-bond-rescue.html
Debt crisis: Angela Merkel defies Latin Europe and the IMF on bond rescue
German Chancellor Angela Merkel has shot down calls for full mobilisation of the eurozone's bail-out funds to halt the raging bond crisis in Spain and Italy, ignoring unprecedented pleas for action from the International Monetary Fund.
8:07PM BST 22 Jun 2012
"Each country wants to help but if I am going to call on taxpayers in Germany, I must have guarantees that all is under control. Responsibility and control go hand in hand," she said after a crucial summit of the eurozone's Big Four powers in Rome.
Mrs Merkel -- or La Signora No in Italy -- doused hopes of a break-through on proposals by the "Latin Bloc" leaders of Italy, France, and Spain to deploy the funds (EFSF and ESM) to cap the bond yields of "virtuous" countries vulnerable to contagion, or to recapitalize banks directly to take the strain off sovereign states.
"If I give moneystriaght to Spanish banks, I can't control what they do. That is how the treaties are written," she said, before racing off to Danzig to tonight for Euro 2012 quarter final between Greece and German..
Christine Lagarde, the head of the IMF, warned before the summit that the eurozone is under "acute stress" and at risk of a downward spiral.
"The viability of the European monetary system is questioned. There must be a recapitalisation of the weak banks, with preferably a direct link between the EFSF/ESM and the banks, in order to break the negative feedback loop that we have between banks and sovereigns."
She called on the European Central Bank to back-stop the financial system with "creative and inventive" measures to fight the crisis.
Italy's premier Mario Monti put the best face on events, insisting that the Big Four leaders had come together at the birth place of the European Project to do whatever it takes to shore up monetary union.
"The euro is here to stay and we all mean it," he said, switching from Italian into English to send an emphatic message to markets and Anglo-Saxon world.
For all the rhetoric at Rome's Villa Madama -- a Rennaissance retreat of the Medici family designed by Raphael -- the trio of Latin leaders seemingly failed to shift German Merkel one inch in the direction of debt pooling or genuine fiscal union.
The contrast between pro-forma talk of "more Europe" in the Roman hills and the festering reality on the ground in austerity Europe was not lost on those at the summit. Across the Tiber, much of Rome was paralysed by a bus and metro strike, evidence of the growing resitance to the harsh fiscal squeeze imposed by Mr Monti's technocrat government.
French president Francois Hollande did not hide his frustration, warning that France would not accede to German demands for a step-change in EU integration until Berlin puts the neuraligic issue of shared debts on the table. "There will be no transfer of sovereignty without greater solidarity, " he said acidly.
The Latin Bloc's soft diplomacy has essentially failed. Europe's key leaders will converge on Brussels for next week's crucial summit as divided as ever on the great issue of the day.
The leaders were left offering the thin gruel of infrastructure projects and long-term investment worth €130bn or 1pc of eurozone GDP, financed by leveraging an extra €10bn of base capital at the European Investment Bank.
Critics say this type of spending will take years to bear fruit and and will do little to halt the insidious process of debt-deflation already at work across much of Southern Europe. "This pact has a `shuffling of the deckchairs' feel to it," said Nicholas Spiro from Spiro Sovereign Strategy.
The four leaders agreed to press ahead with a financial transaction tax to "fight speculation" but it will for now be confined to an advance guard of EMU states, leaving the UK happily outside.
Observers were baffled by the summit optimism of Spanish leader Mariano Rajoy, who said he was "enormously pleased" by progress towards an EMU banking and fiscal union
"There was a powerful committment between all of us to use all necessary means to restore financial stability in the euro zone. The EFSF can buy bonds on the secondary market. It is an objective fact," he said.
Diplomats say Germany may have softened its stance slightly on terms for Spain's €100bn rescue from the eurozone to shore up its banks, due to be activated on Monday.
The EFSF/ESM machinery can be used to cap bond yields, yet Germany is sticking to its position that any use must be activated by a formal request according to EU rules -- entailing draconian controls. There is no sign she is willing to drop her vehement opposition to banking licence for the funds enabling them to draw on the full firepower of the ECB.
Italian officials say Mrs Merkel is hiding behind legal technicalities. The EU Treaties restrict the ability of ECB to act as lender of last resort for governments, but it clearly does have the power to launch quantitative easing -- if need be -- to the ensure financial stability and prevent further contraction of the eurozone money supply. The obstacle is entirely political.
"The Germans are blackmailing the ECB," said one official. "They have more or less threatened to withdraw from the euro if the ECB puts one foot out of line."
The Bundesbank openly criticized the ECB's decision on Friday to relax collateral rules for banks, a move that offers a lifeline to Spanish and Italian lenders running out of assets that can be pledged at the ECB's liquidity window. "The Bundesbank is critical," said a spokesman.
Professor Charles Wyplosz from Geneva University said the entire crisis strategy imposed by Germany since May 2010 had been a "disaster" and risks setting off a chain of sovereign defaults that may bankrupt Germany itself.
"From the very start, it was clear that a domino game was under way. The solution will have to combine debt structuring and ECB lending in last resort to banks and governments. Angela Merkel needs now to lift the German veto," he said.
and......
http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_22/06/2012_448579
Banks sweating over recapitalization terms
By Yiannis Papadoyiannis
The next few days will determine the future of the local banking system, a top official at a Greek lender told Kathimerini, as the new government will have to determine the details regarding the recapitalization process as soon as possible.
Provided negotiations with the representatives of Greece’s international creditors -- known as the troika -- come to a problem-free conclusion, the remaining 25 billion euros put aside to refinance the country’s credit system should be disbursed within the month of July. Eighteen billion euros has already been disbursed as a down payment for the recapitalization of National, Alpha, Eurobank and Piraeus.
The details of the process, including the conditions and structure of the recapitalization, will determine the future and the form of the banking system. The thorniest issue is that of the incentives for private investors to participate in the share capital increases. Banks and investors are keenly anticipating ministerial decisions on the possibilities of private sector investment in the industry.
“For the private sector to have some substantial incentives to participate in the process, it will need to ensure that its participation will be under the same terms as the [Hellenic Financial Stability] Facility,” the Hellenic Bank Association noted recently in a text with proposals submitted to the Finance Ministry. Otherwise, the banks warned, attracting investors will be particularly difficult, which would lead to the nationalization of the credit system.
Bank officials suggest that without a strong banking system which is able to tackle the problems and challenges of the current juncture, the efficient funding of the economy will be impossible and the end of the crisis will become more distant than ever.
The troika is also in favor of the banking sector retaining its private character, as the representatives of Greece’s creditors are fully aware of the malfunctions, inefficiency and poor human resources of the country’s public sector. The most recent report by the International Monetary Fund stressed that Athens should provide ample incentives to ensure the private character of any banks deemed sustainable.
The government of Lucas Papademos chose to postpone the recapitalization process that should have been concluded before the May elections, according to Greece’s agreement with its creditors. The delays and inability to make a decision on the procedure reflect the worries about whether it would be possible to retain the private character of banks given the huge amount of funds the public sector will contribute toward the system’s recapitalization.
and.......
http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_22/06/2012_448567
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We have quite considerably reduced volumes in order to control risk exposure in Greece due to the delays of payments by the market operator.
