ECB to Spain: Drop Dead.

[Puppycow]

(Apologies to Gerald Ford)

ECB Opposes Helping Fund Spain's Bankia

Quote:

MADRID—European Central Bank officials signaled they would oppose any attempt to fund the €19 billion ($23.8 billion) recapitalization of Spain's Bankia SA via the central bank's lending facilities, according to people familiar with the situation.

Spain has pledged the rescue of Bankia, its third-largest lender by assets, at a time when its finances are stretched to their breaking point and the government is desperately trying to ward off an international bailout.

Spain's own bailout fund has only about €9 billion left and, though it can be replenished through debt issuance, recent auctions have seen soaring borrowing costs and falling demand.

So by refusing to bail out Bankia, they make Spain's position more precarious, increasing the likelihood that they will have to bail out Spain, or that, if they refuse to do that, Spain will default on its debts and banks all over Europe will have to be bailed out. Great thinking! It worked so well with Lehman.

[Puppycow]

ECB rejects Madrid plan to boost Bankia

Quote:

A Spanish plan to recapitalise Bankia, the troubled lender, by indirectly tapping the European Central Bank for cash, was bluntly rejected as unacceptable by the ECB, European officials said.

News of the rejection came as Spain faces elevated borrowing costs in the bond markets, tries to persuade investors it can contain problems in a banking sector weighed down by €180bn of bad property loans and, on Tuesday, saw its central bank governor stand down early.

Madrid had floated the unorthodox idea over the weekend of recapitalising Bankia by injecting €19bn of sovereign bonds into its parent company, which could then be swapped for cash at the ECB’s three-month refinancing window, avoiding the need to raise the money on bond markets.

The ECB told Madrid that a proper capital injection was needed for Bankia and its plans were in danger of breaching an EU ban on “monetary financing,” or central bank funding of governments, according to two European officials.

. . .

Senior government officials in Madrid argue that bailouts in Portugal, Greece and Ireland have been catastrophic and Spain will not compromise on its refusal to accept a similar form of intervention.

They said the country had implemented reforms requested by Brussels and must now be granted relief by the ECB, or the future of the single currency will be threatened. The government would like to see the ECB restart its government bond-buying programme and wants the nascent European Stability Mechanism to be retooled as a bank bailout fund.

“This is like a game of poker now,” one government adviser said, “and I don’t think Spain is bluffing”.

Spain says they won't compromise, the ECB says they won't compromise. I don't think this will end well.

[Democracy Simulator]

Spain is too big to bail. Likewise the European banking system. The money printing required is not politically tenable, especially in Germany, which would be picking up the tab. Europe is between a rock and a hard place.

[Blue Mountain]

The United States went through something like this four years ago. Didn't Europe learn anything from that?

[Puppycow]

Martin Wolf's latest column is worth reading.

Quote:

This is how I understand the views of the German government and monetary authorities: no eurozone bonds; no increase in funds available to the European Stability Mechanism (currently €500bn); no common backing for the banking system; no deviation from fiscal austerity, including in Germany itself; no monetary financing of governments; no relaxation of eurozone monetary policy; and no powerful credit boom in Germany. The creditor country, in whose hands power in a crisis lies, is saying “nein” at least seven times.

. . .

In brief, the eurozone is now on a journey towards break-up that Germany shows little will to alter. This is not because alternatives are inconceivable. What is needed is to turn some of the Nos into Yeses: more financing, ideally via some sort of eurozone bond; collective backing of banks; less fiscal contraction; more expansionary monetary policies; and stronger German demand. Such shifts would not guarantee success. But they would give the eurozone at least a chance of avoiding the cost of partial or total break-up. To work in the long run, such shifts would also require greater political integration.

[Francesca R]

You can't recapitalise a bank (or any firm) by lending it money. The term means give it more equity. Governments do that ( . . . From borrowed money, naturally), so this news story is likely a spat about nothing. The ECB has already found myriad ways to support the solvency of governments and private institutions while being able to claim it is doing nothing of the sort.

Similarly Germany has already signed up for quite a lot of things that give it direct risk exposure to other sovereigns as well as indirect risk to them if they were to leave the currency zone. My view is that everyone involved is sufficiently far down the road to fiscal union (while occasionally still being able to say that nothing of the kind has been countenanced) that they will not back out of it now. They just need more and more ways to engineer fiscal union without it looking like that's what's happening. The European Redemption Pact (a German idea) is one such proposal.

[kevsta]

Originally Posted by Francesca R

The European Redemption Pact (a German idea) is one such proposal.

ah, the (Endgame) gold-grab you mean?

[Puppycow]

Originally Posted by Francesca R

The ECB has already found myriad ways to support the solvency of governments and private institutions while being able to claim it is doing nothing of the sort.

But it doesn't seem to be doing enough to give markets confidence that it's safe to lend to these governments and private institutions. They have to be perceived to be solvent too. In this way, it seems like their measures won't have the intended effect unless they are honest about them.

If the ECB says "We will definitely not bail out Spain" then interest rates will rise for Spain, making it more likely that they will need to bail out Spain. Conversely, if they say "We will bail out Spain if necessary" then interest rates for Spain will fall, making it less likely that they will need to bail out Spain.

No?

[kevsta]

Originally Posted by Puppycow

They have to be perceived to be solvent too.

...

No?

and therein lies your problem, they are not.

trying to play poker against the markets, when you have no cards, is always bad idea.

[Democracy Simulator]

Originally Posted by Francesca R

You can't recapitalise a bank (or any firm) by lending it money. The term means give it more equity. Governments do that ( . . . From borrowed money, naturally), so this news story is likely a spat about nothing. The ECB has already found myriad ways to support the solvency of governments and private institutions while being able to claim it is doing nothing of the sort.

Similarly Germany has already signed up for quite a lot of things that give it direct risk exposure to other sovereigns as well as indirect risk to them if they were to leave the currency zone. My view is that everyone involved is sufficiently far down the road to fiscal union (while occasionally still being able to say that nothing of the kind has been countenanced) that they will not back out of it now. They just need more and more ways to engineer fiscal union without it looking like that's what's happening. The European Redemption Pact (a German idea) is one such proposal.

Do you think the German people will have a say, or do you think that they will be hoodwinked into a transfer union by the sophistry of desperate politicians and bankers? I don't think that the powers that be will be able to pull such a fast one.

[Francesca R]

Originally Posted by Puppycow

But it doesn't seem to be doing enough to give markets confidence that it's safe to lend to these governments and private institutions. They have to be perceived to be solvent too. In this way, it seems like their measures won't have the intended effect unless they are honest about them.

The central bank has never been interested in giving markets confidence if the only reason for the confidence is an ECB backstop, hence the (often misunderstood) observation that their actions have consistently fallen short of market "demands" and that they have never yet taken up the role ascribed to them of "the only institution that can save the euro".

The ECB would probably say that Berlusconi wouuld still be in power, there would be no "fiscal compact" and Spain would not have a constitutional requirement to balance its non-cyclical budget, had it done everything that market commentators have clamoured for from the start.

The downside of this mode of behaviour is that there have been much larger income/output losses suffered by many European citizens and businesses, and greater socialisation of state and private liabilities, than might have been the case otherwise. The central bank (probably correctly IMO) is not going to blame itself for that though.

[Francesca R]

Originally Posted by Democracy Simulator

Do you think the German people will have a say, or do you think that they will be hoodwinked into a transfer union by the sophistry of desperate politicians and bankers? I don't think that the powers that be will be able to pull such a fast one.

So far the average German has only seen economic benefit from all this (not that they think this). The country has its lowest unemployment rate in decades, lowest cost of capital ever, cheapest (and most stable) real exchange rate for ages and a massive net export surplus. And as of now, no German taxpayer has forked over anything to a government she didn't have a vote for.

Just sayin'. Rubbish sales job so far from the politicians, but a case could rather be made that this is better than Germany's only viable alternative which is to leave the euro unilaterally itself. Plus, Merkel remains one of the most popular chancellors ever IIRC.

[kevsta]

http://www.marketwatch.com/story/6-r...rst-2012-05-30

uh huh. this is going well then. Opinion I know, but I tend to agree.

Quote:

The Spanish are a lot more likely to pull out of the euro than the Greeks, or indeed any of the peripheral countries. They are too big to rescue, they have no political hang-ups about rupturing their relations with the European Union, they are already fed up with austerity, and there is a bigger Spanish-speaking world for them to grow into. There are few good reasons for the country to stay in the euro — and little sign it has the will to endure the sacrifices the currency will demand of them.

[Democracy Simulator]

Originally Posted by Francesca R

So far the average German has only seen economic benefit from all this (not that they think this). The country has its lowest unemployment rate in decades, lowest cost of capital ever, cheapest (and most stable) real exchange rate for ages and a massive net export surplus. And as of now, no German taxpayer has forked over anything to a government she didn't have a vote for.

Just sayin'. Rubbish sales job so far from the politicians, but a case could rather be made that this is better than Germany's only viable alternative which is to leave the euro unilaterally itself. Plus, Merkel remains one of the most popular chancellors ever IIRC.

Given that all the polls of German voters re: the Greek bailout were decisively against it, I would be very surprised if the majority would be for bailing out the whole of Europe. I expect that when it comes to the crunch, that all the dirty tricks will come out - playing on the German's sense of guilt for past aggression; threats that the world will end if the Germans don't stump up. It's not going to be pretty.

[Hlafordlaes]

Don't forget that much of Europe's trade is among member states. Germany cannot view the collapse of too many of the peripheral countries as anything other than the beginning of a deep depression across the region. While Greece is just small enough to fail, Spain is not, and if it goes, the pressure is next on Italy. There lie monsters in that direction.

No one in their right mind here in Spain is thinking of leaving the euro; US pundits to the contrary have something to sell their target audience.

No, the real problem is that European leaders have been content with a step-wise approach to union for decades, usually avoiding the hard choices. They seem to subscribe still to the notion that this will continue to suffice. The best guess right now is that GreExit will lead to the rest of the EU getting finally serious about what needs to be in place for a common currency to work. Whether that will be too late is a bettor's choice.

[Puppycow]

Why Spain is Officially Europe's Biggest Crisis

[Puppycow]

Spain reveals €100bn capital flight

Quote:

(Financial Times) -- Madrid was dealt a double blow on Thursday after it emerged that almost €100bn in capital had left the country in the first three months of the year and the head of the European Central Bank lambasted its handling of Bankia, the troubled Spanish lender.

Data published by Spain's central bank showed €97bn had been pulled out in the first quarter -- around a 10th of the country's GDP -- as concerns mounted over Madrid's ability to contain its twin economic and financial crises, which have forced government borrowing costs to euro-era highs.

The data appeared to corroborate earlier assessments from economists that foreign investors were selling Spanish assets, while Spanish banks were increasing their holdings of domestic bonds, helped by cash accessed through the ECB's three-year liquidity operations.

"My concern is that we haven't yet seen the most recent numbers, which could be far worse," said Raj Badiani, an economist at IHS Global Insight. "We are seeing a perfect storm."

[kevsta]

Originally Posted by Puppycow

Spain reveals €100bn capital flight

indeed, and those figures are from before Spain really fell apart, publicly anyway

[Puppycow]

Can kicked a little further down the road:

Euro, Asia Shares Climb on Spain Bank Bailout; Oil Gains

Quote:

Spain asked euro-region governments over the weekend for as much as 100 billion euros ($126 billion) to help shore up its banking system, a sign Europe is tackling a crisis that has roiled markets around the world.

[kevsta]

Originally Posted by Puppycow

Can kicked a little further down the road:

Euro, Asia Shares Climb on Spain Bank Bailout; Oil Gains

it's just Greece all over again, $100Bn isn't nearly enough, and actually the ESM still needs to be ratified in the German parliament, and the opposition dont appear too happy about unconditional bailouts of foreign banks.

the bond market also knows this, I expect we'll get a brief respite bounce on Spanish bonds, and then the market will turn and pressure again because 100Bn is not nearly enough (and billions are so 2010 anyway) this will be into 0.25 trillion at least before it's done.

ps. I was in a local branch of Bankia (Bancaja) at 8.15am this morning, one member of staff and 12 people queuing, it's not fixed by any means.

[kevsta]

given ZH's previous accuracy on the Greek bond situation, I think this is relevant.

http://www.zerohedge.com/news/goldma...g-spanish-debt

Quote:

Sadly however, the mere assumption that €100 billion in senior debt will be sufficient to plug the hole in Spanish banks, which rose from €40 billion to €100 billion in under one week, is laughable. And of course, every incremental dollar of senior debt means less value to existing subordinate Spanish bonds.

Finally, confirming that one should get the hell out of Dodge, is the fact that Goldman now is telling its clients to, wait for it, buy Spanish bonds.

and given Goldman's documented sell side Muppetry this means they are unloading Spanish bonds as fast as they can to any remaining muppets left whatsoever.

[kevsta]

lol. pathetic. bailout half-life approximately 8 hours of markets opening.

http://www.zerohedge.com/sites/defau...ly%20Bonds.jpg

Edited by LashL:

Changed hotlink to regular link. Please see Rule 5.

Quote:

Spanish and Italian sovereign bond spreads exploding.

Recall what we said yesterday: "Keep a close eye on Spanish sovereign bonds at the moment when the bond market understands what just happened, and once the euphoria over the very short-term bailout of insolvent Spanish banks passes. Because a month from today another €100 billion will be required, then another €100, and so on." The moment can be seen very distinctly on the chart below: it happened at 2:00am Eastern, and the bond market has not looked back since. We are likely hours away from screams for the ECB to come and re-bail out a just bailed out Spain.

[kevsta]

Originally Posted by kevsta

and given Goldman's documented sell side Muppetry this means they are unloading Spanish bonds as fast as they can to any remaining muppets left whatsoever.

lol

Goldman Sachs set a new speed record in "Facebooking" muppets clients

this is yield, the price went in the opposite direction.

http://www.zerohedge.com/sites/defau...2/06/SPGB%203%

Edited by LashL:

Changed hotlink to regular link. Please see Rule 5.

[Eddie Dane]

Originally Posted by Blue Mountain

The United States went through something like this four years ago. Didn't Europe learn anything from that?

I'm sure we did.
But have you ever seen 'Europe' make anything resembling a decision?

My feeling is that we're pretty much screwed unless we turn on the printing presses.
Germany will never let us because 'inflation=hyperinflation=chaos=Hitler'.

[Democracy Simulator]

Originally Posted by Democracy Simulator

I expect that when it comes to the crunch, that all the dirty tricks will come out - playing on the German's sense of guilt for past aggression; threats that the world will end if the Germans don't stump up. It's not going to be pretty.

Here we go:

Quote:

Italian law professor and elder statesman Antonio Padoa-Schioppa wrote in an open letter to Mr Schaeuble that "the German government is playing with fire" by blocking the crucial steps needed to halt the immediate crisis and restore faith in monetary union.
"The German federal republic has a heavy historical responsibility, more than any other country in the union," he said, warning that the current course threatens "a catastrophe comparable to a third world war."

http://www.telegraph.co.uk/finance/f...ing-union.html

Expect more.

[UndercoverElephant]

Originally Posted by Francesca R

They just need more and more ways to engineer fiscal union without it looking like that's what's happening.

Except that nobody is going to be fooled anymore. The people of Europe have been subjected to a 50 year period of fantasy state-building. The eurozone consists of 17 independent democracies, and however much the people running the europroject would like to be able to engineer a closer union (not just fiscal), they have the slight problem of 17 skeptical parliaments and 17 electorates needing to agree to it....next week.

[UndercoverElephant]

Originally Posted by Puppycow

Why Spain is Officially Europe's Biggest Crisis

...until Italy is. And then France.

[UndercoverElephant]

Originally Posted by Eddie Dane

I'm sure we did.
But have you ever seen 'Europe' make anything resembling a decision?

My feeling is that we're pretty much screwed unless we turn on the printing presses.
Germany will never let us because 'inflation=hyperinflation=chaos=Hitler'.

From the German perspective, it is even worse than that. Last time they printed money like there was no tomorrow, the money was at least going into German pockets. This time they are being asked to print money, devaluing the money already in German pockets, but with the new money going to stabilise banks in other countries.

They may do it anyway. Why? Because the immediate consequences of not doing so are much worse than doing so. That's a fascinating political call, and will have a big influence on how this whole thing plays out. We will find out next week, after Syriza win in Greece, what the Germans are going to do.

I am not yet convinced that any but a tiny minority of people in the eurozone (anywhere in the eurozone) believe that the euro has to break up, but I can't see a politically credible plan to prevent that break up either. That suggests to me that the most likely outcome is a very messy breakup of the eurozone.

[Puppycow]

Originally Posted by UndercoverElephant

From the German perspective, it is even worse than that. Last time they printed money like there was no tomorrow, the money was at least going into German pockets. This time they are being asked to print money, devaluing the money already in German pockets, but with the new money going to stabilise banks in other countries.

I thought it was going to pay war reparations.

Anyway, looks like things in Spain are getting worse again:

http://www.nytimes.com/2012/07/24/bu...ocks-sink.html

[geni]

Originally Posted by Puppycow

I thought it was going to pay war reparations.

Anyway, looks like things in Spain are getting worse again:

http://www.nytimes.com/2012/07/24/bu...ocks-sink.html

Oh no, the markets are angry again. Quick, sacrifice another country.

[PixyMisa]

Originally Posted by Francesca R

Just sayin'. Rubbish sales job so far from the politicians, but a case could rather be made that this is better than Germany's only viable alternative which is to leave the euro unilaterally itself. Plus, Merkel remains one of the most popular chancellors ever IIRC.

Just reading the thread again - if Merkel is so popular at home, maybe the sales job worked exactly as intended.

[UndercoverElephant]

Originally Posted by Puppycow

I thought it was going to pay war reparations.

Anyway, looks like things in Spain are getting worse again:

http://www.nytimes.com/2012/07/24/bu...ocks-sink.html

Yep. Short selling of stocks has just been banned for 3 months. Like that'll solve the problem...

[Puppycow]

Yup. Doomed:

http://www.theatlantic.com/business/...doomed/260233/

[kevsta]

Originally Posted by UndercoverElephant

Yep. Short selling of stocks has just been banned for 3 months. Like that'll solve the problem...

because it worked so well this time last year

Originally Posted by PuppyCow

Yup. Doomed:

http://www.theatlantic.com/business/...doomed/260233/

when the 2 year and the 10 year bonds invert thats the market saying a default is certain, - they'll be going down the PSI route ala Greece (default 1 - 2 is now imminent)

the UK law bonds are now trading at 15% above the Spanish law ones, if this follows the Greek precedent UK law will be paid out at full value and everybody else gets a crew cut.

[Francesca R]

ECB to everyone: We'll do whatever it takes.

[kevsta]

Originally Posted by Francesca R

ECB to everyone: We'll do whatever it takes.

notice he waited until the usual German rumour refuters were all on holiday..

I think he is going to be called upon to back that statement up.

[Tippit]

They're considering monetizing bonds, which was prohibited. But since they have a mandate to loot the public via inflation, debt monetization is now a-ok because they have deflation.

They might as well come out and declare that they have the authority to counterfeit as much money as they want, for any purpose they want, because that's exactly what they will do, if it suits them.

Draghi would be hilarious, if he weren't a hardcore criminal.

[UndercoverElephant]

Originally Posted by Francesca R

ECB to everyone: We'll do whatever it takes.

...unless the German constitutional court stops us...or some other spanner is thrown in the works.

[Puppycow]

Originally Posted by Francesca R

ECB to everyone: We'll do whatever it takes.

The words must be followed by action, and soon, or the markets will conclude that they were only words.

Draghi Boxes Himself Into a Corner With Bond Signal: Euro Credit

Quote:

European Central Bank President Mario Draghi may have boxed himself into a corner.

Spanish and Italian bond markets rallied yesterday as investors cheered Draghi’s signal that the ECB is prepared to intervene to reduce soaring yields. Now he has to deliver, or face deep disappointment on financial markets, analysts said. The risk in doing so is alienating key policy makers on the ECB council, such as Bundesbank President Jens Weidmann.

“Draghi is damned if he does and damned if he doesn’t,” said Carsten Brzeski, senior economist at ING Group in Brussels. “He maneuvered himself into an extremely difficult situation. Expectations are very high.”

The ECB is under pressure to lower borrowing costs after three interest-rate cuts since November failed to stop bond yields rising to records in Spain and Italy, threatening the survival of the euro. The Frankfurt-based central bank shelved its bond-purchase program in March amid opposition from council members including Weidmann, and some economists doubt it will be revived any time soon.

[kevsta]

Originally Posted by kevsta

notice he waited until the usual German rumour refuters were all on holiday..

there we go, a day late, but well, everyone's on holiday

http://in.reuters.com/article/2012/0...8IR6R920120727

Quote:

(Reuters) - European shares turned negative and the euro fell on Friday, after the Bundesbank said it had not changed its critical stance on the ECB buying government bonds.

Draghi said nothing he hasnt said before anyway.