Monday, June 11, 2012

# Spailout - #Spainic ... ponder just how does a bailout rally figuratively just become " Gone In 60 Seconds " Morning glance at items in the news - focus on the bailout of Spain's bank and the implications

http://www.zerohedge.com/news/spanish-bailout-explained-one-image


The Spanish Bailout Explained With One Image

Tyler Durden's picture
Submitted by Tyler Durden on 06/11/2012 16:39 -0400



Pretty much says it all.

and......

http://www.zerohedge.com/news/spailout-spanic

From #Spailout To #Spanic

Tyler Durden's picture
Submitted by Tyler Durden on 06/11/2012 11:52 -0400



When US equity futures, Treasury futures, and FX markets opened yesterday to a 'risk-on / reality-off' scenario, we made it clear that we suspected things would look very different by the European close. Sure enough, the markets in Europe (and US) have seen a dramatic shift in sentiment as the realization of the end-game here grows louder. It is evident that any strength, any rip, is to be sold. EURUSD rallied 1.2% at its best near the open last night but is ending 0.2% lower from Friday's close. Europe's broad equity market is closing modestly red after being up almost 2% at the open. Europe's financial credits led the equity market once again as senior spreads swung from a 20bps rally to a 10bps sell-off by the close. Italy was crushed after opened up over 4% to close down over 2.75% as Italian banks were halted all the way down. Spanish banks gave back all their gains (SAN was up almost 6% at the open and closed red). Investment grade credit notably underperformed and high-beta XOver swung from a 35bps tightening to close modestly wider. European sovereign bond spreads all opened notably tighter but were crushed by the close with Spain and Italy underperforming (+60bps and +50bps from their intraday low spreads respectively). Quite simply, Europe has swung from Spanish bailout fantasy to Europe's contagious panic reasserting - and that was after a weekend when Spain (and Spanish banks and every bullish trader out there) got everything they wanted. It would appear that the investing public has become better-educated at what is really going on in Europe and how these interim 'solutions' are all to be faded as Franco-German relations remain tense and Germany stoic. In liquidity/safety land, Swiss 2Y rates plunged 7bps to a new record -35.3bps. 
European equities (dark blue) fell led by financials credit (blue and red) - this was your tell...
European Sovereigns were dumped en masse, back near record high yields and CDS levels...
As Spanish equities fell from up nearly 6% to down almost 1%...
as even the 'saved' Spanish banks gave it all back (and were downgraded) as SAN dropped from up almost 10% to down 0.8%...
and overall, Europe ended in a sea of red with DAX managing to hold very modest gains...
and Swiss 2Y rates plunged to new record lows at -35.3bps...
Charts: Bloomberg
Finally, we can only hope we are joking, but Zero Hedge has dibs on #SpankruptcyTM

and......

http://www.zerohedge.com/news/europe-brings-out-capital-controls-bazooka


Europe Brings Out The "Capital Controls" Bazooka

Tyler Durden's picture
Submitted by Tyler Durden on 06/11/2012 11:31 -0400



Here we go:
  • EU SOURCES HAVE DISCUSSED IMPOSING CAPITAL CONTROLS AS WORST CASE SCENARIO IF GREECE LEAVES EUROZONE - RTRS
  • IMPOSING BORDER CHECKS, LIMITING ATM WITHDRAWALS ALSO PART OF WORST-CASE SCENARIO PLANNING - EU SOURCES - RTRS
  • SUSPENSION OF SCHENGEN ALSO DISCUSSED
In other words, that money you thought you had... You don't really have it. We can only hope this message was not meant to restore confidence and prevent future bank runs. Because if Europe wanted a continental bank run, it may have just gotten one.
This is getting scary very fast.
Full piece from Reuters:
European finance officials have discussed as a worst-case scenario limiting the size ofwithdrawals from ATM machines, imposing border checks and introducing capital controls in at least Greece should Athens decide to leave the euro.
EU officials have told Reuters the ideas are part of a range of contingency plans. They emphasised that the discussions were merely about being prepared for any eventuality rather than planning for something they expect to happen - no one Reuters has spoken to expects Greece to leave the single currency area.
Belgium's finance minister, Steve Vanackere, said at the end of May that it was a basic function of each euro zone member state to be prepared for problems. These discussions appear to be in that vein.
But with increased political uncertainty in Greece following the inconclusive election on May 6 and ahead of a second election on June 17, there is now an increased need to have contingencies in place, the EU sources said.
The discussions have taken place in conference calls over the past six weeks, as concerns have grown that a radical-left coalition, SYRIZA, may win the second election, increasing the risk that Greece could renege on its EU/IMF bailout and therefore move closer to abandoning the currency.
No decisions have been taken on the calls, but members of the Eurogroup Working Group, which consists of euro zone deputy finance ministers and heads of treasury departments, have discussed the options in some detail, the sources said.
As well as limiting cash withdrawals and imposing capital controls, they have discussed the possibility of suspending the Schengen agreement, which allows for visa-free travel among 26 countries, including most of the European Union.
"Contingency planning is underway for a scenario under which Greece leaves," one of the sources, who has been involved in the conference calls, said. "Limited cash withdrawals from ATMs and limited movement of capital have been considered and analysed."
Another source confirmed the discussions, including that the suspension of Schengen was among the options raised.
"These are not political discussions, these are discussions among finance experts who need to be prepared for any eventuality," the second source said. "It is sensible planning, that is all, planning for the worst-case scenario."
The first official said it was still being examined whether there was a legal basis for such extreme measures.
"The Bank of Greece is not aware of any such plans," a central bank spokesman in Athens told Reuters when asked about the sources' comments.
The vast majority of Greeks - some surveys have indicated 75 to 80 percent - like the euro and want to retain the currency, something Greek politicians are aware of and which may dissuade them from pushing the country too close to the brink.
However, SYRIZA is expected to win or come a strong second on June 17. Alexis Tsipras, the party's 37-year-old leader, has said he plans to tear up or heavily renegotiate the 130-billion-euro bailout agreed with the EU and IMF. The EU and IMF have said they are not prepared to renegotiate.
If those differences cannot be resolved, the threat of the country leaving or being forced out of the euro will remain, and hence the need for contingencies to be in place.
Switzerland said last month it was considering introducing capital controls if the euro falls apart.
In a conference call on May 21, the Eurogroup Working Group told euro zone member states that they should each have a plan in place if Greece were to leave the currency.
Belgium's Vanackere said two days after that call that it was a basic function of each euro zone member state to be prepared for any eventuality.
"All the contingency plans (for Greece) come back to the same thing: to be responsible as a government is to foresee even what you hope to avoid," he told reporters.
"We must insist on efforts to avoid an exit scenario but that doesn't mean we are not preparing for eventualities.


and.....

http://www.zerohedge.com/news/schauble-wants-esm-be-used-over-efsf-spanish-bailoutSchauble

Wants ESM To Be Used Over EFSF For Spanish Bailout
Submitted by Tyler Durden on 06/11/2012 11:05 -0400

European Union Germany Newspaper


... And what Germany wants, Germany gets. Sorry Spanish bondholders.

From Bloomberg

German Finance Minister Wolfgang Schaeuble wants aid for Spain’s banks to come from the future permanent backstop, the European Stability Mechanism, to avoid greater risks for the German budget, Handelsblatt said.

Spain would not be able to guarantee loans from the current backstop, the European Financial Stability Facility, if funds for its banks came from the EFSF, the newspaper said, citing European Union diplomats it didn’t name.


Germany’s share of guarantees to the EFSF would rise in such an event, the newspaper said. The ESM is financed by all 17 euro-region countries, including those that receive funds from it, the newspaper said.
Recall earlier the European Commission (of laughable clowns who get financial advice from JT Marlin?) scrambled to say the Spanish bailout would take place under the EFSF, not ESM, to avoid the whole subordination trigger issue. Oh well.


and......

http://www.zerohedge.com/news/europe-scrambling-avoid-subordination-concerns

Europe Scrambling To Avoid Subordination Threat

Tyler Durden's picture
Submitted by Tyler Durden on 06/11/2012 10:09 -0400



It just gets more and more mind-numbing by the moment. The latest from Europe, which earlier confirmed that ESM loans would get preferred creditor status:
  • SPANISH BANK RECAPITALIZATION LIKELY TO BE IN EFSF BONDS, SIMILAR TO GREEK RECAPITALIZATION - EU OFFICIAL
  • EUROZONE MONEY FOR SPANISH BANK RECAP COULD COME FROM EFSF TO AVOID THE ESM'S PREFERRED CREDITOR PROBLEM - EU OFFICIAL
  • SPANISH BAILOUT COULD LATER BE TAKEN OVER BY THE ESM, BUT EXTENDED LOANS WOULD NOT BECOME SENIOR TO OTHER DEBT
  • Nothing like figuring out your hare-brained bailout attempt was a failure from the beginning. Ok: Here are the problems with this band aid:
    1. Unfunded
    2. Temporary, and eventually will be replaced by the ESM. Markets can, luckily, still discount.
    3. Negative pledge issue still exists asFinland made all too clear. Countrieswill demand extra security interest while under EFSF regime and until ESM priming comes in play.
    Finally, all of this, is just semantics. To quote from SocGen earlier: "If the loans are paid by the ESM, the loans given to FROB will be more clearly senior to SPGBs, though we expect de facto seniority in any case."
    Ball is in your court Europe.
http://www.zerohedge.com/news/newedge-spanish-people-may-regret-bailout


Newedge: Spanish People May Regret This Bailout

Tyler Durden's picture
Submitted by Tyler Durden on 06/11/2012 07:26 -0400




And another bank does a book report on our Saturday post explaining the Spanish bank bail out. At this point, it should be all too clear how Spain's only solution to being in a very deep hole is to keep on digging.
From Newedge's Nicholas Hasting
  • Cost of Spanish funding may yet rise even more
  • Subordination of bond holders under ESM rules is an issue
  • Reaction in Ireland and Greece not helpful to yields
  • Spanish banks may be off the hook for now, but the Spanish people aren't.
    The level of sovereign debt has just been increased but the ability of Spain to fund it hasn't.
    Just look at the market's reaction to the weekend's events in which Spain got the European Union to promise to provide EUR100 billion of loans to refund its financial sector.
    On the surface, the package all looks like manna from heaven.
    Spanish banks get the money they need to cover their gargantuan mortgage losses and stay afloat and the Spanish government, by not seeking a sovereign bailout, escapes the imposition of more austerity measures that the other bailout candidates, Ireland, Portugal and Greece, were forced to undertake.
    Prime Minister Mariano Rajoy is certainly trumpeting the package as a major victory for Spain.
    So why has the cost of funding 10-year money fallen by only 13 basis points, leaving yields still at a crippling 6.07%?

    And why has the euro itself only gained about one and a half cents on the news?
    Because now, sovereign Spain may be more exposed than it was before.
    Part of the problem is the package itself.
    The other part is how the rest of the euro zone reacts to it.
    Although Spain may have preferred for the money to paid direct to the banks, Brussels, or maybe one should say Berlin, insisted that the funds be provided to the government for distribution through its Fund for Orderly Bank Restructuring.
    This means that it is the state, not the banks, that is responsible for the debt and that the country's debt-to-GDP burden could be pushed as much as 10% higher if all the funds are used. Instead of peaking at 82% of GDP in 2013, the ratio may now continue rising as far as 95% of GDP in 2015.
    With the economy still expected to shrink by as much as 2% this year and tax receipts likely to decline in a similar vein, Spain is only likely to get relief unless its funding costs decline significantly.

    And this may not happen.
    At the moment, it remains unclear whether the loan will come from the European Stability Mechanism, which comes into effect next month, or from the existing European Financial Stability Facility.
    If it is the former, creditors of the new loan will take priority if there is any default and existing holders of Spanish bonds would find themselves at the back of the queue.
    This is hardly likely to encourage investors to continue buying Spanish bonds and the country could yet find that its funding costs remain high or even climb higher.
    High yields could also continue to be a problem for Spain because of the response from other peripheral debtors to what is being seen as preferential terms being given to Spanish banks.
    Ireland has already expressed its displeasure and is demanding that Brussels provide Irish banks with a similar deal retroactively.
    However, it could be the impact on Greece that is most damaging to Spain. The country's left-wing Syriza Party, which is campaigning ahead of elections on Sunday on a ticket of rejecting the terms of bailout, sees the Spanish deal as justification as to why Greece should refuse to accept further austerity.

    This could increase the chances of a left-wing victory on Sunday and raise the risk that Athens will eventually be forced to leave the euro.
    The general withdrawal of investors would not only leave the single currency floundering but it would mean even higher funding costs for peripherals and the Spanish people would find that the added burden of bailing out Spanish banks has fallen on their shoulders.

and....



http://www.telegraph.co.uk/finance/markets/9324040/Debt-crisis-Markets-fall-back-and-bond-yields-rise-as-Spanish-reality-sets-in.html


Spain's IBEX, led by banking shares, soared 6pc on opening, with the FTSE 100 climbing 1.3pc. However, by midday the Spanish index was up 2.5pc, the FTSE 100 had fallen back to a 0.9pc gain, the CAC had risen 1.5pc, the German DAX was 1.8pc better off and the Italian MIB was up 0.5pc.
Ten-year bond yileds had also reversed. In early trading, the 10-year Spanish yield fell 20 basis points to fall below the 6pc "danger level". However, they were at 6.209 by midday, up four basis points.
The euro also lost earlier gains, falling back to $1.2566.
Analysts believe today's early positive outlook for the eurozone following the bailout has now faded. "Today stock markets have risen but we fear that investors have yet fully to embrace what the Spanish bailout might mean," said Jeremy Batstone-Carr at Charles Stanley. "Where will the money to fund Spain’s banks come from? Certainly not the IMF and unlikely the European Stability Mechanism. The ESM does not formally exist yet and importantly, has yet to be ratified in Germany, the country seen by many as Europe’s key underwriter."


Joshua Raymond at City Index agreed: "The bailout is nothing to celebrate however, despite the market cheer on Monday morning... Depending on which side of optimism or scepticism you reside, the bailout either qualifies the severity of the fiscal deterioration within the indebted countries of the euro area or reminds of the determination that resides in Brussels, Berlin and Paris to maintain the solidarity of the eurozone and reinforce is glass fiscal walls from constant shattering."

http://www.telegraph.co.uk/finance/debt-crisis-live/9323444/Debt-crisis-live.html
12.20 And a bit more from Bruno Waterfield on that inspection of Spain's finances by EU and IMF officials:
12.10 The other detail on the Spanish bailout now coming through is on which EU fund will stump up the money.
A German government spokesman said the permanent ESM fund, which comes into effect on July 1, is mos likely to be the source. Martin Kotthaus said:
QuoteThe ESM is a more likely option than the EFSF... The ESM is in almost every regard more effective than the EFSF.
It will depend when Spain submits its formal application for financial aid whether the ESM is used, Mr Kotthaus said.
12.00 Bruno Waterfield, our man in Brussels, is reporting details of how a Spanish bank bailout might be arranged, via Twitter. It looks like it will indeed involve supervision by the EU, ECB and IMF, meaning it is more similar to the other bailouts than it at first seemed:
11.50 Spanish shares are still up, but not nearly as spectacularly as first thing this morning, when they jumped close to 6pc. The IBEX index is now up 2.5pc, while yields on 10-year government bonds have gone back above 6pc.

11.20 Cold water has been poured on Ireland's hopes for a renegotiation of its bailout - also designed to row out banks which had taken on too much debt in a property boom - following the agreement with Spain.
The Irish Times reports this morning that because the money will not go directly to Spain's banks but be guaranteed by the government, it does not open the way for Ireland to receive direct bank aid too, removing onerous terms on the Irish state.
11.05 Questions are already being asked about Italy, following Spain's agreement to a bank bailout over the weekend. And Italian politicians are already giving the idea short shrift:
Italy has "already done what was needed to save itself," said industry minister Corrado Passera.
07.50 Joaquin Almunia, the EU Competition Commissioner, has spoken about Spain's bank bailout this morning - and it doesn't look good for people hoping Spain has not handed over any financial independence with the move.
The banks which receive aid will have to present restructuring plans to to EU, Mr Almunia said this morning, and there will also be a visit of the "troika" - the EU, the European Central Bank and the International Monetary Fund - to Spain.
06.50 Ambrose Evans-Pritchard maintains that Europe's democracies must not subcontract their destiny to the Bundesbank:
The weekend deal is a fresh evasion by EU leaders. Another loan package will be inflicted on another country that cannot afford more debt, though the stakes are higher this time.
Europe’s democracies can stop this destructive course before it is too late. They do not have to subcontract their destiny to the Bundesbank. The broad Latin bloc commands the majority votes to compel the ECB to act as lender of last resort and reverse monetary contraction. They should use that power.
If such a confrontation causes Germany and its satellites to storm out of EMU in a huff, that too is a solution of sorts. Monetary asphyxiation would end. The Latin euro would weaken to equilibrium levels. Capital would flow back into southern Europe once the boil had been lanced.

Just do it. Call the German bluff. One bound and you are free.


and..






http://www.zerohedge.com/news/farage-spanish-bailout-reinforcement-failure


Farage On The Spanish Bailout: "A Reinforcement Of Failure"

Tyler Durden's picture
Submitted by Tyler Durden on 06/10/2012 22:55 -0400




While the short-term benefits can be weighed against any long-term solution a number of ways, Nigel Farage provides not just the most colorful summation of situation but also the most succinct when he refers to the 'madness' of 'intervention to keep the Euro alive' as "reinforcement of failure". The better, and braver, in his opinion, thing to do, is to recognize that those Mediterranean countries should never have joined the Euro in the first place. As we have stated again and again, by kicking-the-can once again to prop up the euro-zone with bailout-after-bailout, all we are doing is prolonging the misery. The discussion on Sky News digs into the collateral-damage 'strawman' - which will happen anyway - and then 'Red' Ken Livingstone (an infamously socialist-leaning British politician who advocated for Britain's joining the Euro when it was formed) now somewhat notably agrees with Nigel that "locking Europe into a decade of permanent economic malaise" adding thatonce the smaller countries were added to the core, "it was doomed to fail". The two 'odd fellows' continue on to discuss the analogy of the USA to a United States of Europe noting that it took a civil war and a century before a common monetary and fiscal policy was accepted, adding simply that Europe's "nations will not give up their sovereignty".

Overnight Summary: Euphoria Fading, Reality Setting In


Tyler Durden's picture
Submitted by Tyler Durden on 06/11/2012 07:14 -0400




After hitting overnight highs of 1.2670, the EURUSD has wiped out nearly all of its gains following the Spanish "bailout", and was last trading just +40 pips higher compared to the Friday close. Same thing with Spanish bonds: these reacted favorably initially, but slowly the bondholder realization that they just got primed has settled in, and with sovereign CDS still a questionable hedge courtesy of ISDA, the only real hedge isselling, and have now drifted wider on the day, as have Italian bonds following a Bloomberg piece which notes the patently obvious: Italy Moves Into Debt-Crisis Crosshairs After Spain. Expect US stocks, always last to get the memo, to realize that Europe has not only faded the entire move, but is now appreciating it for what it is: a confirmation of failure.

Below is a full summary of the catalysts driving the overnight action.

In focus
As the Wall Street Journal reminds us, "Greek Election Poses The Next Major Threat." We believe investors should remain defensive as there are still plenty of things that can go wrong in the Euro area. The upcoming Greek elections on June 17 pose the biggest near term risk. For more take a look at: What if Greece Exits The Euro?
Market action
The markets are reacting positively to Spain's request for external help in recapping its banking sector. Most Asian equity markets finished sharply higher with the Hang Seng leading the pact up 2.4%. The Japanese Nikkei rose 2.0%, the Korean Kospi finished 1.7% higher and the Shanghai Composite finished 1.1% higher. The only regional market that we cover that finished lower was the Indian Sensex down 0.3%.
In Europe, equities are up 1.4% in the aggregate. The region's blue chips are outperforming up 1.9%. At home, futures are also pointing to a strong open. The S&P 500 is set to open 0.7% higher. 

In bondland, Treasuries were selling off overnight due to the risk on atmosphere - the 10-year yield was as high as 1.72% at one point - but as the day progress yields have been falling. The 10-year is now only trading at 1.66%. In Europe, Spain's 10-year yields are flat at 6.18% while Italy's 10-year is up 6bp to 5.81%. German bunds are 3bp higher at 1.36% and UK gilts are 3bp higher at 1.65%. 

The risk on trading is causing the dollar to weaken with the DXY index down 0.5%. Commodities are mixed; WTI crude is 89 cents higher at $84.98 while gold is down $3.38 an ounce to $1,589.93. 
The key takeaway from China's May data is that unless there is a significant rebound in June, there is downside risk to second quarter GDP. Consensus estimates for second quarter growth is 7.9% yoy - that is above our in house estimate of 7.6% yoy, the lowest estimate on the street. We expect that other houses on the street will mark down their growth estimates over the next couple of weeks. Currently our Chinese economist is sticking with his current growth rate forecast for the second quarter but notes there is a slight downside risk to his below consensus estimate as well. 

Our Chinese economist, Ting Lu, lowered his inflation forecast for 2012 to 3.2% yoy from 3.5%. A large part of that is due to our commodities team taking down their estimates of crude prices. Our commodity team has recently revised down forecast of Brent and WTI crude oil spot price to US$106 and $97/bbl respectively in 2H12 (from US$116 and $107/bbl previously). Ting expects that China's central bank will cut both their deposit and lending rates by 25bp once more this year. 

Also on the policy front, Ting expects the government to start or speed up more projects and to make project financing easier via cutting RRR/ interest rates, approving more enterprises bonds and lifting more lending restrictions. However, without a Greek exit from the Euro area, he expects the size of the overall stimulus could be relatively small (slightly below 1% of GDP). 
Over the weekend, Spain announced that it will present a formal request for financial assistance to restructure its financial sector. The Eurogroup said it is ready to lend up to €100 billion to cleanup and recap Spanish banks. The final amount and details of the program would be released after knowing the results of the two independent audits due June 21. Our Euro area team views this as a positive step.

Today's events

This week's data highlights include the inflation trifecta of CPI, PPI and the import price index. We expect core CPI, released on Thursday, to come in at 0.2% MoM and 2.2% YoY - close enough to the Fed's 2.0% target. Look out also for retail sales on Wednesday: the report is likely to be weak, undermined by a contraction in gasoline sales and soft auto and chain store sales. 

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