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ECB to Spain: Drop Dead.

Puppycow

Penultimate Amazing
Puppycow
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(Apologies to Gerald Ford)

ECB Opposes Helping Fund Spain's Bankia

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.
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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.
 
ECB rejects Madrid plan to boost Bankia

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”.
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Spain says they won't compromise, the ECB says they won't compromise. I don't think this will end well.
 
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.
 
Martin Wolf's latest column is worth reading.

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.
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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.
 
Francesca R said:
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.
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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?
 
Puppycow said:
They have to be perceived to be solvent too.

...

No?
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and therein lies your problem, they are not.

trying to play poker against the markets, when you have no cards, is always bad idea.
 
Francesca R said:
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.
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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.
 
Puppycow said:
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.
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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.
 
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Democracy Simulator said:
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.
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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.
 
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http://www.marketwatch.com/story/6-reasons-spain-will-leave-the-euro-first-2012-05-30

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

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.
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Francesca R said:
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.
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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.
 
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.
 
Spain reveals €100bn capital flight

(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."
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Puppycow said:
Can kicked a little further down the road:

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