Goldman On Spain's Tension-Inducing Arrogance

Tyler Durden's picture

Spain needs external financial support – a view that is now clearly held by the consensus. A swift and smooth move by Spain to request external support is needed to validate the recent improvement in market sentiment towards Spain (and an improvement in financial markets more broadly). Mr Draghi's announcement of the ECB's new Outright Monetary Transactions (OMT) scheme offers a vehicle for that support. Goldman believes that the Spanish authorities now need to get on board the vehicle by requesting EFSF support.

Goldman Sachs: Tensions With Spain Set To Increase, Sooner Or Later

Spain's larger size implies that this external support needs to be more flexible than was the case for Greece, Ireland and Portugal. This flexibility is what the ECB's OMT scheme provides: the ECB's balance sheet can be used to purchase short-dated sovereign debt when a country has accepted the conditionality that accompanies a request for parallel support from the EFSF.

Yet the effectiveness of the ECB's initiative requires governments to act responsibly: both over the longer term in making the fundamental reforms to meet the conditions set by the EFSF and in the shorter term by moving smoothly to accept EFSF conditionality.

We had previously expected Spain to make a request for EFSF support at the Eurogroup meeting at the end of this week. This has proved overly optimistic and we therefore revise our view. While a later formal request to the EFSF ahead of Spain's end-October redemptions should prove sufficient to contain re-emergence of intense market pressures, some disruptions cannot be ruled out. And while Spain is seen to prevaricate on the basis of domestic political concerns, German public and political opinion can become further inflamed. With German sentiment already sensitive to announcements, seeking protection in the form of tighter conditionality may only make Spain more reluctant to request help and therefore intensify the difficulty.


Near-term and medium-term risks becoming evident

Beyond the weak economic fundamentals that imply Spain will ultimately require further external support, the main risk currently stemming from Spain is that the government loses the incentive to reform if it is guaranteed that the ECB will purchase its debt.

  • Near-term risk – current deliberations over Spain’s agreement to conditionality suggest Spain is willing to push to the limit the market’s tolerance for a slower transition to EFSF support.
  • Medium-term risk – even when Spain is subject to conditionality within an EFSF programme, the imperfect nature of monitoring could tempt Spain to exploit the ECB’s preparedness to buy its debt.

In European Economics Daily ‘The ECB’s new measures: Bridging and/or breaking Europe’s ‘red line’’, we forecast that Spain would submit a formal request for external support at this week’s Eurogroup meeting. That request would then be followed in the second half of September with broader agreement on EFSF support with other Euro area member states. We also noted an alternative view where Spain delays seeking EFSF support so as to meet domestic political constraints. On account of signs of that reluctance – against a background of improved market conditions – we believe that the risk of this delay is materialising. Other interpretations of the delay are possible: Spain may be delaying on account of the publication of bank-by-bank stress tests at the end of September. Nonetheless, we are revising our view of the base case.

We also highlight, however, that the timing of any formal request will depend on market tensions, which in the past have proved a forcing mechanism for (often overdue) political action. We continue to believe that Spain will need to submit a request for EFSF support before its redemptions on October 29 and 31.

While – as we have seen in the case of Greece – various forms of cash management allow Spain to avoid a hard 'cash flow' constraint should support not be in place prior to the October redemptions, we would see a failure to deliver the anticipated programme request by then as disruptive.

Beyond the near term, a problem with incentives

As we have pointed out in the past, we continue to believe that a move by Spain to require EFSF/ESM support will ultimately prove inevitable. This suggests that the more substantial risk is the medium-term risk of a more awkward relationship developing between Spain and the broader Euro area. Based not merely on the latest signals from Spain but also on the incentives we have noted above, we believe this risk applies. Applying conditionality is always difficult in practice – still more so when a country has a large primary deficit, as Spain does, and can be perceived as taking undue advantage of central bank financing.

Beyond Spain, beyond the near term

Looking beyond Spain – specifically to Germany – brings together the two factors we have highlighted:

  • The risk of a near-term delay in Spain’s request for EFSF owing to a reluctance to be submitted to conditionality.
  • The ‘moral hazard’ risk that Spain slackens in its efforts to meet conditionality once external support is sought. We do not expect major changes to Spain's current reform programme, although there is a risk of additional structural reforms being requested, particularly if Spain delays further.

The opposition seen in Germany in response to Mr Draghi’s preparedness to buy sovereign debt implies that current posturing in Spain will not wear well with the politics of signing a Memorandum of Understanding in Germany. The more the Spanish administration indulges domestic political interests and is perceived to be taking undue advantage of external support, the more explicit conditionality is likely to be demanded. This would add to any existing tensions, given Spain’s opposition to conditionality. This is disappointing partly because it is avoidable if Spain were to accept the external support on the terms currently available.

Spain will have the opportunity in the coming weeks and months to demonstrate that it wishes to avoid these incipient risks. But we continue to believe that some of the incentives created by Mr Draghi's preparedness to act could prove difficult to resist.

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Ahmeexnal's picture

In the USA it is zombies.

In France, it is...werewolves:

A flock of ewes were found dead by their owners, savagely killed and often with their throats cut, in the town of Les Mauges, near Nantes. Locals speculated a wild dog or a wolf may be to blame.

But a team of werewolf experts from Paris have been investigating the scene, convinced the half-man half-wolf beast is responsible for the attacks.

Time to load up on SILVER BULLETS.


knukles's picture

Well isn't that special....
Goldman referring to somebody else's arrogance.



Booyah Bitchez!


I mean seriously, those peole need for something really bibically prophetic to befall them, serious punishment for eternity.
See, that's what God is for...

john39's picture

you are giving them way too much credit with your reference to goldmanites as people...

Dareconomics's picture

Spain has to finance at least €90bn from now until the end of the year, and that is a conservative estimate. Spain is phuqued:

nodhannum's picture

Spain isn't fucked or phuqued.  The Germans will do what the banks want and like it or else.  Remember it is Greece, Spain and Italy that hold the cards here.  Owe a banker $10,000 and can't or won't pay it and your in trouble.  Owe the same banker or group of bankers €10,000,000,000 and their in trouble.  Germany has lashed herself to the Titanic.  By the time the muppets figure that out it will be too late.

fonzannoon's picture

The day Mark Grant has been yapping about for months comes and goes and he gave us the greatest gift he could have possibly given today. Nothing.

Dareconomics's picture

Next year is worse. They'll need to finance at least €195bn based on their own projections, more likely €255bn. They're really, really phuqued:

Rajoy will continue to play chicken with the European, because he has the upper hand:

Yen Cross's picture

 This is highly reminiscent of a "Popeye Cartoon". I'll gladly pay you someday, for a couple hundred billion (€) today.

  Put some extra "stipend", on that before you send the CHEQUE (ECB) BITCHEZ!

Hype Alert's picture

This is hilarious. 

mor·al haz·ard Noun: Lack of incentive to guard against risk where one is protected from its consequences,


nodhannum's picture

mor·al haz·ard Noun: Lack of incentive to guard against risk where one is "thinks that one" is protected from its consequences.  There, fixed it for ya.

knukles's picture

I thought a moral hazard was Bill Clinton alone in a dark room with an intern or a bowling ball. 


(Well, it's got 3 holes, too.)

Yen Cross's picture

 That was funny / Knukles!   Blue bowling balls?

asteroids's picture

Spain/Italy knows what happens if you go down the Troika road. You become Greece! You think they want that?

Albertarocks's picture

I agree.  I think the "tension" Goldman is talking about is their own sense of tension caused by the fact that Italy and Spain aren't showing the "latin heat" that Goldman was expecting.  Goldie not only 'wants', but 'needs' Spain to come begging for more money in order for the ECB to further carry out its goal, that of capturing all of Europe in the giant spider web of debt induced slavery.  I think you're bang on and if so, Goldman and the rest of that den of demons could be in deep, deep, deep shit themselves.  We probably can't imagine how much better off the entire world would be if Spain first, then Italy, give the bankers what they deserve, the big salute and a big "FU, we're defaulting.  How do ya like them APPLs?"

CrashisOptimistic's picture

Austerity leads to a party being destroyed.  That's what happened to PASOK in Greece.  They are down to single digit support now, and ran everything for many years.

There Is No Way In Hell Spain will embrace austerity now.  Here is Spain's position:

Rajoy: "I have instructed my banks to increase the number of credit default swaps on Spanish soveriegn bonds and Spanish bank bonds to 10X their previous level.  Now then, you will give Spain money without pre-condition or we will default on these loans and take down the global banking system.  Is there anything about what I've just said you do not understand?  I won't bother asking for your decision.  As long as I am sure you understood what I said, I already know your decision."


Ned Zeppelin's picture

Spaniards are a passionate people and not to be underestimated.  After all, they used to rule the world's oceans.

gggunchi's picture

This is truly awesome.


This however would require Rajoy to put Spain ahead of the EU, which we know is impossible for a EU politician these days. 

Piranhanoia's picture

Club Med, where you know you have Europe hanging by their vacation.  You can see them sweat.

Italy got a year off austerity.  The threat of leaving is terrifying to the northern lights.

Robslob's picture

In case no one has noticed...and by looking at Spain's debt sales, they haven't, Goldman Sux has absolutley been playing both sides of this banka bondpalooza.

In the end, sheep will be sheered, sovereignty degraded and people rioting in the streets by day and drinking fine Spanish wines by night.

Rinse repeat until it doesn't work and threaten M.A.D. when in doubt.

A laugher at best.

jessiekay's picture

The new telegraphist of Goldman in Z€rop€ is known as Mr Draghi !!! Interesting, no ????

ebworthen's picture

According to BBC World Service German Court approved ESM bailout fund.

$680 billion of more debt to "solve" a debt crisis.

Spain now to go trick-or-treating with glee.

yogibear's picture

The German judge costumes look like modified Iron Chef uniforms. They even have bibs.

Rip van Wrinkle's picture

Please don't believe a word that comes out the Bolshevik Broadcasting Corporation. It makes MSNBC and CNN look 'fair and balanced'.

knukles's picture

But they sound so intelligent with that posh accent....

NotApplicable's picture

Yeah, especially when Jane Standley reported that WTC Bldg 7 had collapsed when it was still standing in the shot behind her, only to collapse 20 minutes later. It takes a really, really smart person to pull that off!

knukles's picture

Love ya' NotApplicable... a perfect demo of why things be so good here... everybody knows and remembers....


Colonel Klink's picture

Different day, same shit with all of this.  Wake me when it's over.

Ironic Golum ballsacks comments on arrogance.

yogibear's picture

Why should club med do anything. Since the ECB will never let the large countries out of the Euro they can keep dragging their feet and asking for more and more bailouts. It seems to be working.

buzzsaw99's picture

gollum preaching about arrogance. lulz

economicmorphine's picture

This is fucking hilarious.  Spain understands that it can do whatever it wants and the money will keep coming.  In fact, if they do whatever they want, the money will come more quickly.  It's the same principle that causes US ghetto trash to buy filet mignon and cheap wine with their EBT cards.  I get it.  Money isn't worth anything.  Give me metal.  I want metal. Nothing but metal.  I wonder if Bernanke and Draghi will be hanged on the same day.  Don't cry for me, Argentina.

Rainman's picture

I can't understand why the Spanish are so arrogant. Their food sucks.

kito's picture

clearly you havent been must prefer big macs and kfc....................

dwayne elizando's picture

I prefer KFC for my snap dollars.

Yen Cross's picture

I concur Rainman. Spanish food is a bit bland. +3  Then again, they got beat back, by both the French & English!

  (Multiple Times)

khakuda's picture

You have to love it.  The theater aspect of it all is great.  The ECB jawbones Spain's rates down and takes away any immediate pressure to sell their souls to the ECB and Goldman.  Muchisimas gracias.  Now you stupid Germans leave us alone so we can get back to dreaming about Claudia Bassols and Penelope Cruz making out.


bugs_'s picture

well it seems that central bankers and those closest to them have no shortage of arrogance - it may be a 1:1 correlation between debt levels and arrogance levels.

WhiteNight123129's picture

Wage inflation is coming, Bernanke did it, the capital destruction of bonds and equities is finally coming, the very beginning of stagflation is finally getting close. Gold might solf on no QE but that would mean stagflation starting so buy in the heavy sell.



NotApplicable's picture

There is absolutely no way wages will inflate this time, as capital destruction eliminates the wage pool. (then there's the effect on the pension ponzi to consider)

In the good ole days, the pool could be refilled by the benefits of the Petrodollar, but that scam is GONE, as the whole world has now been drained of unencumbered capital.

RSloane's picture

You have posted your "THANK YOU BERNANKE" several times in several threads. Yet you never go back and respond to people who have posted a response to you. I'm beginning to suspect your intentions [that was putting it politely].

RSloane's picture

Look, I realize Goldman is a force to be reckoned with and is a political and financial squid with tentacles in all sorts of governments. I fully realize that what they have to say is very important to a lot of assclowns, I mean people.

Having said that, reading or listening to anyone who has anything to do with Goldman is like inviting Voldemort over for tea then being outraged when he skull-fucks you.

Pancho Villa's picture

Spain will hold out for the best deal that it can get. That is not arrogance. It is just good bargaining. So there may possibly be a few tense moments before a deal is inked.

CDSMonkey's picture

What. % of zh/abc media does Goldman own?

americanspirit's picture

Goldman Sachs is talking about someone else's "arrogance"? Stop, stop - you're killing me. My laughter is completely out of control.

green888's picture

In dealings with a single Spaniard, he had to have his way, although we were saying this was not the way forward. When it all collapsed as we predicted it would he came back wailing and throwing his arms about, but by then we had walked, never to return

RiskAverseAlertBlog's picture

"...timing of any formal request will depend on market tensions, which in the past have proved a forcing mechanism." No discussion of the "forcing mechanism" of a Spanish debt whose size makes threat of default one giant F you to Mrs. Hitler's conditionalities? Spain has absolutely no incentive to submit to Germany's insane BS. Goldman Sachs worries about "the 'moral hazard' risk?" THAT'S RICH!!! And what is one to read between the lines per "incipient risk" to Goldman remaining a going concern should the EMU disintegrate?