Spain: the Pain the Bailout Forgot

EU leaders hailed it.

Merkel & Co. gave their blessing to it.

UK leaders nodded in mild approval to it.

The IMF applauded it [from the sidelines.]

And markets, of course, ‘sold’ it.

It’s not that frequent for the political discourse at key points in Europe’s financial crisis to be ‘called out’ by public opinion so quickly.

But this time the general wider opinion got in step with the oft’ skeptical markets PDQ.

The European Union’s €100 billion solution for Spain’s banking crises is arguably that inadequate, it’s obvious to all.

Even so, there are a number of key figures and details about Spain’s finances and the EU’s latest bailout which are important but not so readily apparent.

I’ve tried to distill the major ones into a few main points below.

[NB: as usual, I’ve had a lot of help from ‘economists’ spam’, but the responsibility for the following is my own.]

Spanish Debt to the Markets vs. €100 Billion

Spain’s government needs to refinance about €82.5 billion worth of bonds this year, with a concentration of maturities in early in 4Q. Plus, the regions also have to refinance almost €16 billion in 2H. Additionally, the central government and regions will have to fund a €52 billion deficit this year.

Before the EU agreed to provide the neat, round-numbered €100 billion to Spain’s banks late last weekend, a 77-page IMF report, released a little earlier, claimed Spain’s banks were suffering a crisis that was “unprecedented in modern history.”

It said Spanish banks would need at least €37 billion to withstand a sharper economic contraction.

The figure is similar to the one Fitch gave when it recently slashed Spain’s rating by three notches.

Additionally Banco de España [this is the bank’s English page]: recently estimated that €180 billion worth of the known €300 billion in real estate related loans outstanding “in Spain are “troubled.”

That’s not including a €655 billion-sized overall mortgage ‘portfolio’ owned by Spanish banks.

It’s interesting that Spain’s central bank judged less than 3% of the ‘portfolio’ to be in “non-performing” loans and carried at full value.

That’s even though house prices in Spain are down by a quarter since the 2007 peak and one in four Spanish workers are unemployed.

Independent auditors’ report expected by or on June 21.

The Role of Credit Agencies and their Ratings

 

It’s been easy to dismiss the role of the credit rating agencies during this crisis.

I’ve been just as guilty in getting a cheap laugh at their expense as anyone else.

However, as we know, the agencies have a serious role with respect to collateral valuations which could have all of us laughing on the other side of our faces.

We know that the ECB takes the highest of the three ratings from the main agencies when determining the size of the discount to apply to different collateral.

We also know that Moody’s still rates Spain at A3.

That’s out of step with the other main agencies:

S&P: BBB+

Fitch: BBB

If [OK, when] Moody’s cuts Spain, Spanish bonds will fall into a new collateral category and an additional 5% discount is likely to be applied across the curve.

Some say the ECB could change the rules, but it seems unlikely – especially with Ireland muttering and Greece already complaining about ‘one rule for one and another for Spain…’

A bigger discount would require Spanish bonds used as collateral (Hello, again, Spanish banks) to be repaid more or less immediately or a haircut to be taken.

ESM. Or EFSF. [Not that it particularly matters at this point]

That’s just one detail which has yet to be decided.

 

Another question is what will happen to Spain’s planned share of contributions to the likely source of its bailout, the ESM, not to mention the rest of its share of guarantees for residual EFSF?

Spain’s agreed share is about 12%.

€60 billion of the ESM could therefore be kyboshed.

And if indeed the EFSF really did have €248 billion in as yet uncommitted EFSF funds in March, Spain’s €24 billion share might not be there either.

Early indications are that Spain will go ahead with its plan to be a guarantor.

Later indications during the crises have underlined the fact that few things are as guaranteed as they appear.

The remaining countries not receiving aid will have to increase their commitments or the firewall will be marginally smaller.

I’ve decided to largely leave Cyprus out for the moment.

Obviously its contribution to the crises is more on the left hand of the ledger than the right.

The latest.

But because the EU offered Spain funds, prior to Cyprus’ request, we’re left with the dark comedy of Cyprus facing the prospect of having to share the cost of Spain’s aid before seeking its own.

It’s, yes, another detail which has yet to be decided.

As is the political dimension, involving the already bailed-out and their EU state creditors and any resulting political pressure thereof.

ThSM

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