http://ftalphaville.ft.com/blog/2012/07/10/1078701/the-bail-in-spain/
http://soberlook.com/2012/07/as-spains-2012-funding-requirements.html?utm_source=BP_recent
1. The €34bn assumes target budget deficit for 2012 of -5.3%. The actual number could be considerably worse, requiring additional funds.
2. This funding requirement does not cover regional needs for funding. And the regions are no longer able to roll some of their own debt (due to their rising deficits and debt levels). Therefore the central government will have to step in to bail out the regions.
This tells us that Spain's funding requirements may be considerably larger than previously estimated. The table below from CS shows three possible scenarios.
Spanish periodic government auctions have been quite small in recent months - about €2bn each. But as the last row of the table above shows, Spain will need to step these up dramatically (double or triple the amount) in order to raise the funds it needs for the rest of the year.
And who is going to buy this incremental debt? So far it has been the Spanish banking sector, who often used their own bonds guaranteed by the Spanish government to borrow under the LTRO program (the process of using own paper to borrow from the ECB is described in this post). But two changes took place recently that will be quite problematic for the Spanish government.
1. The 3-year LTRO program is no longer offered by the ECB (for now), making it harder for banks to obtain term financing needed to fund volatile Spanish paper. As the data below shows, net purchases by Spanish banks have been limited recently (the big spike early in the year was driven by the LTRO). In fact the small recent auction purchases have been from Spanish pensions instead of banks.
2. The ECB has just changed their collateral rules and may no longer be accepting bank issued government guaranteed bonds (h/t Kostas Kalevras; also see this postby Joseph Cotterill)
Submitted by Tyler Durden on 07/10/2012 17:28 -0400
The bail-in Spain
With a big hat-tip to El Pais, the draft memorandum of understanding for Spain’s bailout. We’re still reading through all the conditions imposed on Spanish banks…. Click pic for full doc
Featuring bank bail-ins for subordinated debt, notably:
And also a Nama-style bad bank to begin buying distressed loans in November:
Update – A couple of other sidelights…
This paragraph doesn’t really restore faith in Spanish bank bad loan provisions to date, including Spain’s once-feted dynamic provisioning:
The current framework for loan-loss provisioning will be re-assessed.On the back of the experiences of the financial crisis, the Spanish authorities will make proposals to revamp the permanent framework for loan loss provisioning, taking into account the temporary measures introduced during the past months, as well as the EU accounting framework. Furthermore, the authorities will explore the possibility to revise the calibration of dynamic provisions on the basis of the experience gathered during the current financial crisis. To this end, the authorities will submit by mid-December 2012, a policy document for consultation to the European Commission, ECB, EBA and IMF on the amendment of the provisioning framework if and once Royal Decree Laws 2/2012 and 18/2012 cease to apply.
While going back to the bail-in point — this bit on retail investors:
Consumer protection and securities legislation, and compliance monitoring by the authorities, should be strengthened, in order to limit the sale by banks of subordinate debt instruments to non-qualified retail clients and to substantially improve the process for the sale of any instruments not covered by the deposit guarantee fund to retail clients. This should include increased transparency on the characteristics of these instruments and the consequent risks in order to guarantee full awareness of the retail clients. The Spanish authorities will propose specific legislation in this respect by end-February 2013.
and with spain , best bet is worse case of 2011 budget deficit - which means they have to issue up to 77.5 billion euros more of debt ......
TUESDAY, JULY 10, 2012
As Spain's 2012 funding requirements increase, the nation may need to finds other buyers for its debt
On a relative basis Spain's government funding requirement for the remainder of the year is fairly modest - about €34bn (discussed in this post). Analysts at BNP Paribas were quite comfortable that Spain should be able to cover its 2012 funding needs. But there may be a problem.
1. The €34bn assumes target budget deficit for 2012 of -5.3%. The actual number could be considerably worse, requiring additional funds.
2. This funding requirement does not cover regional needs for funding. And the regions are no longer able to roll some of their own debt (due to their rising deficits and debt levels). Therefore the central government will have to step in to bail out the regions.
This tells us that Spain's funding requirements may be considerably larger than previously estimated. The table below from CS shows three possible scenarios.
 |
| Source: Credit Suisse |
Spanish periodic government auctions have been quite small in recent months - about €2bn each. But as the last row of the table above shows, Spain will need to step these up dramatically (double or triple the amount) in order to raise the funds it needs for the rest of the year.
 |
| Source: Credit Suisse |
And who is going to buy this incremental debt? So far it has been the Spanish banking sector, who often used their own bonds guaranteed by the Spanish government to borrow under the LTRO program (the process of using own paper to borrow from the ECB is described in this post). But two changes took place recently that will be quite problematic for the Spanish government.
1. The 3-year LTRO program is no longer offered by the ECB (for now), making it harder for banks to obtain term financing needed to fund volatile Spanish paper. As the data below shows, net purchases by Spanish banks have been limited recently (the big spike early in the year was driven by the LTRO). In fact the small recent auction purchases have been from Spanish pensions instead of banks.
 |
| Source: Credit Suisse |
2. The ECB has just changed their collateral rules and may no longer be accepting bank issued government guaranteed bonds (h/t Kostas Kalevras; also see this postby Joseph Cotterill)
The ECB (see attached document): - Counterparties that issue eligible bankbonds guaranteed by an EEA public sector entity with the right to impose taxes may not submit such bonds or similar bonds issued by closely linked entities as collateral for Eurosystem credit operations in excess of the nominal value of these bonds already submitted as collateral on the day this Decision enters into force.That means that at least for now Spain's banks will be unable to absorb the increased auction sizes from the Spanish government. Spain will need to find other buyers - soon.
CS: - Spain is now rapidly falling behind its issuance schedule and needs to start increasing the size of its auctions. If the Spanish banks are unable to provide support, the date at which a new buyer is required is fast approaching.But we all know there are no significant private buyers of this debt outside of Spain. It is therefore quite possible that before the end of the year, the ESM rescue vehicle will not only be required to bailout Spanish banks, but will also be asked to buy material amounts Spanish government paper (possibly in addition to Italian paper - Italy has €120bn to raise). And that's just to get through this year.
and..
http://www.zerohedge.com/news/spanish-financial-sector-mou-analysis
( to check the thirty two conditions , hit the link ! )
Spanish Financial Sector M.O.U. - Analysis
- Book Value
- Consumer protection
- ETC
- European Central Bank
- Eurozone
- Gross Domestic Product
- International Monetary Fund
- Stress Test
- Transparency
Via Peter Tchir of TF Market Advisors,
Spain MOU: I give it a C+ or B-
The devil is in the details and we finally have the Spanish Bank rescue details.
The cost is not mentioned. We do not know the cost of the borrowing or how long it will last for. That ultimately will be key. Short dated, high coupon loans will not help much. Long dated, low coupon loans will help.
The seniority issue doesn’t seem too badbut reading the documentation it looks like it must have been extremely contentious as it can’t help but say it is going to Spain time and again where it was unnecessary.
The other reason the seniority doesn’t look too bad is because it doesn’t look like much money will get doled out. The timing seems far too long. This is a political fix and one where they live in some bankers world rather than a traders world. I am VERY concerned about the long timeframe for implementation. The immediate availability of €30 billion is good, but I have my doubts that it will be distributed.
Concerns about “conditionality” seem overdone. Virtually all of the new conditions apply to the financial sector and many are common sense and things that should have already been getting done. Yes, they include the mention of Spain’s obligations, but that is only briefly mentioned, and by and large is just what Spain has already agreed to (though now maybe there will be repercussions if they don’t meet those targets). In any case, the conditions for Spain seem to only hit in 2014, which is definitely a lifetime away.
The use of a “bad asset” vehicle makes me nervous. I think that adds a level of complexity and risks taking time and using money and resources inefficiently.
So I give it a C- or B+ because it looks like it will take too long to implement, is cumbersome, and no details on the cost are yet available. I think they went out of their way to avoid the subordination issue which is a positive, but offset by the fact that costs aren’t known and we need to see money actually put into the banks.
The rest is my first take as I went through the document.
Conditionality
Well, right in the first paragraph the issue of conditionality is brought to the forefront. “Conditionality will be financial-sector specific and will include both bank-specific conditionality in line with State aid rules and horizontal conditionality”. I admit, I have no idea what “horizontal” conditionality means but I assume it means that some conditionality will apply to the country as well as the banks. The convoluted way of saying that makes me suspicious. Why not just say it? Seriously, what is “horizontal conditionality”?
It goes on to state that Spain has to comply with its commitments under the EDP, etc. That doesn’t seem surprising, but the market was hoping for no conditionality for some reason so it seems disappointed.
Seniority
“assistance will be subsequently taken over by the ESM, once this institution is fully operational, without gaining seniority status”. They actually spell that out. I’m impressed as that is a big step, though I have my doubts about when ESM will come on line.
Recent Economic and Financial Developments and Outlook
Not much to say here, though they do try to carve out the “few large and internationally diversified credit institutions” as still having access to markets.
Key Objectives and Restoring Soundness and Timeline
They give a little “shout out” to the Spanish authorities for taking steps to address the problems.
They are heading down a “bad” bank path, which I never understand. It always seems that the pile of bad assets just grows when you go down that path, but others like the idea and it seems a focus of the strategy.
The belief that some transferring bad assets to some external asset management company is part of their strategy. Is the name “Le Lane de Maiden” taken?
The “first tranche” of €30 billion will be ready this month. Since not all of the conditions will be met, the approval to release looks rigorous but the money will be there, coming from the EFSF. Expect big issuance from the EFSF if they are going to have €30 billion ready.
Then the plan starts to go further downhill. Stress tests are to be completed in second half of September. Banks will then be categorized into need based groups sometime in October. This is starting to drag on. The plan comes with a very nice chart, but it seems to drag on.
The focus is disappointingly on stress tests and good vs bad asset segregation.
At least the document is written with some comic relief. We get two new acronyms though I have to say the Expert Coordination Committee might be the best one yet.
In accordance with the appropriate governance structure established in the Terms of Reference for this exercise, a Strategic Coordination Committee (“SCC”), involving, together with the Spanish authorities, the European Commission, the ECB, the EBA and the IMF and an Expert Coordination Committee (“ECC”) will closely oversee the work carried out by the independent firms. The latter will provide full updates every two weeks to the SCC.
There is a lot of spaced devoted to describing burden sharing and recap versus “resolution”. Resolution is just a fancy way of saying shutting the insolvent ones down.
I like the idea that real capital will be injected and that it does appear as though it will be done with care, but I am getting nervous that there is nothing indicating a real desire to see banks grow and create new business. Just turning the banks into better functioning zombies will not help the Spanish economy.
The “AMC” or Le Lane de Maiden will receive what looks like an equity injection from the FROB and then will attempt to issue debt. So there will be leverage on the bad asset side. The transfers from banks to the AMC will be at the “real (long-tem) economic value (REV) of the assets”. I’m assuming that is somewhere in between actual value and book value. Seems like a joke as someone gets to make up a number that these are “really worth”. That seems a direct contradiction about burden sharing as it lets banks sell assets at prices that are artificially high and sticks the assets on a balance sheet that won’t be funded by existing bank shareholders, but by the citizens.
Horizontal Conditionality Explained
It starts with “Spanish credit institutions” having to meet a variety of guidelines and regulations. I assume that most of these are conditions you would want the banks to have as an investor anyways.
Something paragraph about concentrations and related party transactions – not sure if that is good or bad, but the review isn’t until January 2013 so I’m not overly concerned either way.
Another page or so of conditions but focused on credit institutions and frankly they seem reasonable.
It looks like the Banco de España is meant to take some powers currently controlled by the Ministry of Economy. It looks like they are trying to separate the central bank from the government. I assume this is part of the effort to create a Eurozone banking system that is more uniform.
By 2013 there will be no active bankers in the governing bodies of the FROB. Wow, more progressive than our own Fed.
Public Finances, Macroeconomic Imbalances…
Okay, this must be where the conditions get bad. Well it looks like they have until 2014 to meet some deficit targets, and since the percentages of GDP are left blank, it looks like there is wiggle room. At the rate this crisis is evolving, 2014 seems like a lifetime away, and it looks like it is just following the EDP recommendations.
Some of the things Spain is supposed to do, look like it will hurt the housing industry rather than helping it, but some reforms look like ones we could use ourselves – “reduce delays in obtaining business licenses, and eliminate barriers to doing business”.
Programme Modalities and Monitoring
Man, they really like using the word modality in Europe. This part looks bad as it states that “Spain would require an EFSF loan”. Only later do they mention that FROB is involved. This definitely makes it look more like Spain than FROB with a Spanish guarantee.
The programme duration is 18 months. I hope that is the time to allocate the capital and not when the loans are supposed to be paid back. I’m not sure why this would take 18 months, even with the bizarre method they have chosen. A fast injection done over 3 months would give the Spanish economy a much better chance of turning the corner. This is likely to just drag out with weak banks barely staying afloat rather than aggressively pursuing new business.
Lots of monitoring, but the bulk of it seems to be at the financial institution level, though they do mention the Macroeconomic Imbalances procedure and the Excessive Deficit Procedure, but the Excess of 3 Letter Acronyms Pact (ELAP) has not been finalized.
* * *
and can Spain actually craft a credible plan ( in about two weeks or so ) to reduce their deficit over two years - based on their plan for 2012 , can one really trust them to deliver ?
Spain must produce two-year reform blueprint to get eurozone money
Mariano Rajoy has to come up with more spending cuts, tax reforms and labour market changes by end of month to qualify
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The eurozone gave Spanish prime minister Mariano Rajoy a year’s leeway in meeting Brussels’ budget targets. Photograph: Andrea Comas/Reuters
The Spanish government has until the end of the month to produce a persuasive two-year blueprint of structural reforms in order to qualify for a €100bn (£79bn) eurozone rescue of its distressed banking sector.
A draft memorandum of understanding between Madrid and the eurozone authorities, to be finalised on 20 July and obtained by the Guardian, stipulates that the centre-right government of Mariano Rajoy has to come up with more spending cuts, tax reforms and implementation of labour market changes for the bailout to go ahead.
The draft accord also gives the European commission intrusive rights of scrutiny over the Spanish banking sector, 90% of which is to be subject to the bailout terms in a programme that is to run for 18 months.
"The European commission in liaison with the European Central Bank and the [London-based] European Banking Authority will be granted the right to conduct on-site inspections in any beneficiary financial institutions in order to monitor compliance with the conditions," says the 20-page document.
Eurozone finance ministers, meeting until the early hours of Monday, wrestled over the detail of the Spanish bank aid package, with Rajoy keen to create the impression that the bailout applies solely to the financial sector and comes with no strings attached for government fiscal and economic policy. Given the ongoing recession in Spain and the high cost of borrowing feeding speculation that Madrid may ultimately need a full-blown sovereign rescue, the eurozone gave Rajoy a year's leeway in meeting Brussels' budget targets, confirming that he would have until 2014 to get the deficit to the eurozone benchmark of 3% of gross domestic product. But he has to quickly come up with further policy shifts.
"Spanish authorities should present by end-July a multi-annual budgetary plan for 2013-14, which fully specifies the structural measures that are necessary to achieve the correction of the excessive deficit," the draft states.
The draft agreement fails to specify what rate will be charged for the eurozone loans and also makes no mention of the key point that emerged at the Brussels meeting – who might be liable for eventual losses from the injection of eurozone bailout capital into Spanish banks.
Olli Rehn, the European commissioner for monetary affairs, reiterated on Monday that Spain would not need to supply guarantees for the bailout funds. A recent EU summit decided to try to break the link between weak sovereigns and failing banks by allowing for the direct recapitalisation of banks while bypassing the host country. But the meeting of finance ministers delivered conflicting signals on this.
It remains unclear who will be responsible if the eurozone countries, in the form of the bailout fund, take out equity in Spanish banks and later sell off the shares at a loss.
"As the linkages between the banking sector and the sovereign have increased, a negative feedback loop has emerged. Therefore, restructuring (including, where appropriate, orderly resolution) and recapitalisation of banks is key to mitigating these linkages, increasing confidence, and spurring economic growth," the document says.
The first tranche of €30bn is to be disbursed at the end of the month as Rajoy presents his new policies. The beneficiaries comprising 14 banking groups are split into four categories according to the need for recapitalisation, which is to be determined by October by detailed stress-testing of every individual bank. Toxic assets, mainly accruing from Spain's ruinous property bubble, are to be dumped in a bad bank or "assets management company".
Brussels is to gain substantive say over who survives and which banks need to be wound up, a process likely to take until the end of the year, and Brussels will have the final say on who qualifies for rescue funds, according to the draft.
"The Spanish authorities and the European commission will assess the viability of the banks on the basis of the results of the stress test and the restructuring plans. Banks that are deemed to be non-viable will be resolved in an orderly manner," says the document. "No aid will be provided until a final restructuring or resolution plan has been approved by the European commission."
Can Spain pull a rabbit out of the hat by the end of July ? A real cliffhanger here.......
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