How The ECB Is Turning Spain Into Greece

Tyler Durden's picture

As Spanish CDS surge and bonds shrug off the very recent gloss of a 'successful' Italian debt auction, the sad reality we pointed out this morning is the increasing dependence between Spanish banks, the sovereign's ability to borrow, and the ECB. As ING rates strategist Padhraic Garvey notes this morning, the bulk of the LTRO2 proceeds were taken down by Italian (26%) and Spanish (36% of the total) and the latter is even more dramatic given the considerably smaller size of Spanish banking assets relative to Italy. The hollowing out of the Spanish banking system, via encumbrance (ECB liquidity now accounts for 8.6% of all Spanish banking assets), is a very high number - on par with Greek, Irish, and Portuguese levels around 10% where their systems are now fully dependent on the ECB for the viability of their banks. His bottom line, Spain is not looking good here and while plenty of chatter focuses on the ECB's ability to use its SMP (whose longer-term effectiveness is reduced due to scale at EUR214bn representing just 3% of Eurozone GDP), consider what happened in Greece! The ECB did not take a Greek haircut and so the greater the amount of Greek debt the ECB bought, the greater the eventual haircut the private sector was forced to take. By definition, every Spanish bond that the ECB buys in its SMP program increases the default risk that private sector holders are left with. Only outright QE, a promise not to default and a willingness to expand the ECBs balance sheet with ownership of the entire stock of Spanish debt if necessary (in the extreme) would be enough to cause a material positive effect from ECB intervention but it is clear from the massive compression in German yields (and weakness in Spain) that the market remains nervous amid an ongoing preference for core. Of course the cycle of crisis, as BNP noted, from crisis to complacency is becoming more chaotic and less sustainable.

ECB dilemma / Bank liquidity

Latest central bank data (which comes out with a lag) shows that the 2nd 3yr LTRO was dominated by Spanish and Italian banks. Specifically we estimate that Spanish banks took down 36% and Italian banks took down 26% of the total. The larger takedown of Spanish banks here is significant as the size of its banking assets are lower than those of Italy, hence in proportional terms Spanish banks have shown the greatest need for 3yr LTRO cash.

On an on-going basis Spanish banks now take down some 316bn of ECB liquidity, which represents 8.6% of its banking assets. This is a very high number. By way of comparison Greek, Irish and Portuguese banks take down some 10% to 12% of their banking assets in ECB liquidity, and these systems are basically fully dependent on the ECB for the viability of their banks. Spanish banks are not far behind on this metric. The next worst are Italian banks with the liquidity takedown of 6.5% of their banking assets.

Bottom line, Spain is not looking good here. There has also been a warning shot aimed at Ireland from the ECB's Asmussen, who asserts that the current amount of liquidity support extended by the ECB and through ELA (additional liquidity support through the Irish Central Bank) "needs to be substantially reduced over time". He also warns that Ireland should be very careful on any deviation from the original promissory notes agreement, suggesting that any restructuring here should be preceded by reduced bank reliance on emergency liquidity assistance.

At the other extreme, Dutch banks take down a mere 0.4% of their banking assets in ECB liquidity, and latest data show German banks taking liquidity to the equivalent of 0.6% of their assets. We estimate that German banks took down 8% of the 2nd LTRO while the Dutch take down was significantly small. The French need for ECB liquidity is higher, with total ECB takedown running at 147bn, which represents 1.7% of its banking assets, and we estimate that French banks took down 12% of the 2nd 3yr LTRO.

In the past three weeks there has been evidence that the beneficial effects of the two 3yr LTROs are largely behind us, with spreads under widening pressure again. In the meantime there has been no evidence of ECB bond buying through its SMP program. While the SMP may be resumed and would have a positive impact, it could ultimately risk making things worse. Why? Consider what happened in Greece. The ECB did not take a Greek haircut. So greater is the amount of Greek bonds that the ECB bought, the greater was the size of the private sector haircut required in order to get to the 120% medium-term debt/GDP target.

A baseline assumption is that the same could happen in the future i.e. if there had to be, say a Spanish, restructuring (albeit unlikely) at some point in the future that the ECB would not share in the pain. By definition then, every Spanish bond that the ECB buys in its SMP program increases the default risk that private sector holders are left with. The SMP program has survived the Greek default event because the ECB did not take a haircut, but that action in itself has impaired the effectiveness of the SMP. Only outright QE, a promise not to default and a willingness to expand the ECBs balance sheet with ownership of the entire stock of Spanish debt if necessary (in the extreme) would be enough to cause a material positive effect from ECB intervention.

A more positive gloss has taken hold in the past few days, coinciding with Italy getting paper into the market yesterday amid a strong convergence theme for peripheral spreads to core. However, the fact that 2yr Schatz trade close to a single digit and that the 5yr area is trading so rich to the curve tells us that this market remains very nervous amid an ongoing preference for core.

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Vampyroteuthis infernalis's picture

Spain is 10X the size of Greece. When the final days come, the ECB will be way above its head. Fool me once shame on you. Fool me twice shame on me. The bond holders will remember.

tallen's picture

More concrete shoes for Spain, it's not going down fast enough.

Oh regional Indian's picture

Spain was always the first major target nation in the EU.

You see, the Spainards are nto above a little riot-action, which the TPB use to their great benefit. It's all a controlled game.

Of course Spain will look more and more like Greece, but with the size of everything (Economy, population, in-debted-ness), the crash will be heard around the world.

Don't also forget Santandar + it's LatAM tentacles...

And France soon after. 

Libya is producing a 100 barrels of oil a day right now.

Get that. a 100 barrels.



CrashisOptimistic's picture

Your data is inaccurate.

Libyan oil production is much higher than 100 barrels/day.

Oh regional Indian's picture

Sure crash, it's 150 perhaps. Point was it's orders of magnitude lower. 100 is a number I read in a couple of articles yesterday.

Perhaps you can 'supply" details?


spanish inquisition's picture

You need to set the circular graph on its side to show the effect of time as it spirals down to the end result.





          Spanish Gold

A banzai'd banker with open maw

Stoploss's picture

Better get that gold HIDDEN...............................

Like, yesterday..

German confiscation crew headed their way.

Zero Govt's picture

they'll get as far as Athens airport and the socialists will strike... they'll never see their luggage ever again

youngman's picture

we talk about a Market ....why is there still a market..I would have sold a long time ago and would be watching from the sidelines....A Spanish bond....yeah right...I would never buy today..and I would sell what I have right now...

Schmuck Raker's picture

"...a promise not to default..."


Doubleguns's picture

Private bond holders have to realize thier pants are down to thier ankles and vasaline is being applied between the cheeks. They chould count themselves lucky... at least there is vasaline.

Canucklehead's picture

Germany leaves the euro when Germany defaults on it's politically assigned ECB euro debt.

If the ECB prints, they print with the understanding that they have no backstop from Germany.  Germany has a "number" assigned to the perceived value of the euro experiment.  Once that number is broached, the euro experiment is on it's own.  By their actions, it is my guess that Germany has deemed that the number has been broached.  That is the main reason behind their position to not accept bogus PIIGS debt via the ECB.

When the bad bank, ECB, blows up, there will be a flight to the American Dollar and the German neo-Deutschmark.  Politics will focus on the pariah nation states that dragged everyone into this mess.  Capital controls, trade restrictions and migration restrictions will set the table for those states who will determine the fate of the rest of the world.

The PIIGS will be excluded from the global arena if they choose to go their own, separate way.  If they have no sense of responsibility for their actions, they should not expect benevolence from the rest of the world.

Koffieshop's picture

I invite you to watch that. I doubt you will feel that being "excluded from the global arena" will be a curse in the decades to come and that there will be any "world benevolence" for anyone.

SheepDog-One's picture

Guinea PIIGS wheel world economy.

Dr. Engali's picture

So when do the people of the world wake up and take notice that this is global and it's going to it them too? It's just going to work it's way up the food chain.

schatzi's picture

Greece is tiny. Spain is the 4th largest in the €-zone. It simply cannot go Greece's way. That would be the end of the Euro and a financial fallout off the scale. I have a family with kids and a job here in the Eurozone. Fuckit, this isn't fun anymore. I hold NOK, SEK and gold, but what else can I do but watch as this train I'm on is heading off the cliff? I'd rather be on the $ Titanic. No joking.

Yogieu's picture

At least you are trying to prepare yourself. Good luck. Just in case buy some silver as well. It will be probably easier and safer to sell coins which are worth not as much as gold, and they are more affordable.

Sandmann's picture

But you don't know where the Gladio arms dumps are and having gold without a gun is what they call failing to have cover for your defences

Dick Darlington's picture

Goldman pushing "positive" spin on spanish banks today. Says also that BASED ON FUNDAMENTALS, spanish sovereign bonds should trade 50 bps TIGHTER.

Muppets, ears and eyes open now! DO NOT FALL INTO THIS TRAP!


If u have BBG terminal, type GSECSBNK (index). That's an index of spanish bank equities. Very close to Mar 2009 low...

Negro Primero's picture

Tired of where you live? Buy yourself a little charming medieval town in Spain and declare yourself an Emperor!

Agent P's picture

Farewell and adieu to you fair Spanish ladies...


Zero Govt's picture

Hey we're all turning into Greece

i even have yoghurt for breakfast now preparing for rioting, protests and economic meltdown (it's something in the bacterias culture i think, very birthplace of democracy)

vincent van goo's picture

Spanish CDS surge?

When this all plays out, the swaps will be ignored like Greece.  It is like taking 100 hits of acid, then taking 100 tablets of TUMS, they will cancel each other out, right? 

Davalicious's picture

You may be interested to know that Bangladesh is in the process of being fucked. The IMF just lent Bangladesh 600+ Million dollars. In return, Bangladesh has to raise tax revenue. They are pumping out bullshit retrospective taxes, culling funds from business. The export businesses have paper thin margins; they have a problem suddenly paying a retrospective 3 year tax.

It is an old story. Politicians are corrupt and care only for themselves. "The people" don't mind hearing about "The Rich" being squeezed, until Atlas shrugs.

The IMF are in Bangladesh in spades, throwing out loans like sharks. Nice shark, pretty shark.. Perhasp George Souros, known Philanderer *ahem* Philanthropist will soon be over to "help". 

ElvisDog's picture

Wait, I'm confused. Why does the IMF bother with Bandladesh? Does that country have any wealth to stripmine?

The Navigator's picture

Because it's the Last country on the globe that hasn't been stripmined.

Look for Bechtel and Haliburton to start building power plants the country doesn't need and can't afford; doesn't matter as long as tax mules are enslaved.

Sandmann's picture

Hell if you stripmine Bangladesh and send in a camera crew they'll be telling Westerners it's Global Warming wot did it and Send More Aid. Off will go Cameron The Cretin and offer oodles more cash from the 30% increase in postage stamps he just imposed and Obamatron will urge the European Union to send more money so the IMF can bring it home to new York banks

ElvisDog's picture

ECB loans are money thrown down the Spanish toilet because the structural budget deficits in Spain are not only not getting smaller they're getting larger. The U.S./Euro political leaders are the very definition of cowards - they make a situation worse and worse by avoiding taking a difficult course of action while hoping against hope the situation resolves itself on its own.

Sandmann's picture

Argentina is trying to seize Repsol's Argentinian subsidiary

Spain on Friday threatened Argentina with retaliation if it nationalized oil major Repsol's YPF operation


Then we have Alphaville reporting from Sober Look:

In particular the regions are uneasy about the new law that allows the central government to intervene if the regions "misbehave" fiscally.

Dingleberry's picture

"It's all Greek to me" 

-The ECB