Ray Dalio Issues Stark Warning: Spanish Collateral Is Running Out

Tyler Durden's picture

Confirming what we described in detail in March, Bridgewater's Ray Dalio notes in his Daily Observations that "Spanish banks' collateral is running out in a way that could force them into an ELA." The manager of the largest hedge fund in the world - so not some self-perpetuating political mouthpiece - estimates that the Spanish banking system has only a few hundred billion euros left in eligible collateral and that some of the weaker banks are likely already getting close to a point where their collateral is exhausted. Critically, if this occurs, then Spanish banks will need to turn to its own Emergency Liquidity Assistance (ELA) program. An ELA for Spanish banks would likely be several times the size of those in place for Greece and Ireland, further fracturing the uniformity of central bank standards across the eurozone, and the magnitude of funding coming through the national central banks could accelerate rapidly. This increasing Balkanization of European central banks and funding capabilities only entrenches the impossible task of fiscal union as 'more' sovereign control transfer will be required in return for any core backstopping. Furthermore, those who are hoping for LTRO3: no collateral, no deal! Which the IMF just confirmed is a flashing red warning:



Just EUR300bn left in Spanish Collateral: Then What?


An ELA for Spanish banks would likely be several times the size of those in place for Greece and Ireland, further fracturing the uniformity of central bank standards across the eurozone, and the magnitude of funding coming through the national central banks could accelerate rapidly.


Spanish Banks' Collateral Is Running Out in a Way That Could Force Them Into an ELA


We estimate that the Spanish banking system only has a few hundred billion euros left in eligible collateral. That means that some of the weaker banks are likely already getting close to a point where their collateral is exhausted. (We think this reality is the reason why we are seeing a number of legal changes in Spain that look like an attempt to scrounge up a bit more capital). if Spanish banks run out of ECB collateral, then the Spanish central bank would likely need to turn on its own ELA. The potential magnitude of such an operation would dwarf the nationalized money printing to date.


Spanish balance sheets can probably support about €800 billion of borrowing from the ECB. Between the ECB and privately secured funding, mostly foreign interbank, Spanish banks are already borrowing about €500 billion, and if private secured funding was pulled, this borrowing and related collateral could be shifted to the ECB. So we think about the remaining capacity to borrow as the total collateral borrowing capacity (€800 billion) less what is pledged to both the ECB and private lenders (€500 billion), or about €300 billion. However, this almost certainly overstates Spanish banks' collateral cushion because there are strong banks such as BBVA and Santander that probably have ample capacity and weaker banks that are likely much closer to being tapped out.


The attempt to manage the imbalances among the Euroland economies is an extremely dangerous highwire act, and to the extent that monetary policies diverge to serve individual countries' needs, the further capital flows will likely go in the opposite direction.

The Balkanization of European Central Banking Continues

We think that one of the bigger risks facing the Eurosystem is the continuing division in its central banking system. Wien the euro came into existence, the individual national central banks within Europe became mostly implementers of a common ECB monetary policy. But as the European debt crisis has dragged on, the national central banks have gradually begun to conduct policies that are creating a differentiated monetary policy between core and peripheral countries (as we'll describe below). The more the national central banks create easier policy within weaker parts of the eurozone, the more they stimulate money creation in the weaker parts of Europe that will logically flow to the stronger parts -- which will only put more pressure on the currency union.

The ECB's rejection of Greek government bonds as Eurosystem-eligible collateral is the most recent example of the growing balkanization, as it will require Greek banks to again turn to their national central bank's ELA for funding, an avenue that basically allows them not to adhere to the ECB's borrowing standards. The real looming risk, however, is in Spain. Spanish bank funding needs continue to grow, system-wide ECB-eligible collateral is running low (and anecdotal signs of banks seeking to create new collateral suggest to us that some banks are probably already almost out), and there is a real chance that the Spanish banks could soon need to turn to an ELA of their own.

An ELA for Spanish banks would likely be several times the size of those in place for Greece and Ireland, further fracturing the uniformity of central bank standards across the eurozone, and the magnitude of funding coming through the national central banks could accelerate rapidly.
Recall that, like the Fed, the ECB has a hub and spoke structure, with policy directed by Frankfurt and implemented by the national central banks (NCB's). But unlike the Fed, which has been around for a very long time and is the national central bank of a single, indivisible sovereign, the ECB is still in its infancy and represents a collective of 17 countries with very different risk tolerances, incentives, and historical perspectives. And importantly, these countries are not bound very tightly in a fiscal union. The ECB charter reflects this, providing a reasonable amount of autonomy and authority to individual NCB's, which was not utilized until the debt crisis. This autonomy has recently translated into the increasing use of emergency liquidity facilities (ELAs) and lending against non-standard collateral by the NCB's. And unlike standard ECB repo lending operations, these loans are solely backstopped by the applicable NCB and, if necessary, the domestic government in that country.

This creates a two-tier monetary policy - exactly what Draghi just tried to tell us he is avoiding.

The ECB has taken some steps:

Emergency Liquidity Assistance (ELA's)
NCB's received, under the original construct of the European Central Bank, certain autonomous rights, including the ability to determine their own policies with regard to the provision of domestic liquidity. However, few central banks ever actually operated outside the Eurosystem for more than very limited purposes. This changed with the onset of the sovereign debt crisis. Several NCB's have opened ELA's, which theoretically give them the ability to unilaterally set collateral standards, terms, and haircuts for lending to the domestic banking system. The risks arising from these ELA loans are borne by the NCB's (since these transactions are "outside" the Eurosystem) and backstopped by the domestic government. The ECB has the ability to shut down these facilities with a two-thirds vote of the governing council (and we believe that the ECB is involved in the set-up and maintenance of ELA's), but technically the NCB's do not require the ECB's approval to open an ELA. Our current estimate of ELA's is €180 billion.

Non-standard collateral
In concert with the recent LTRO's, the ECB announced an expansion in eligible collateral for repo operations. The NCB's had to submit for ECB approval the non-standard collateral they would accept. However, even with the ECB's approval, the risk of loans backed by non-standard collateral is borne by the individual NCB's, not the ECB. After the second LTRO, ECB President Draghi said that €53 billion of non-standard collateral had been accepted by the ECB. We don't know if this number has changed since that time. There is potential for this number to go much higher. It should also be noted that once again we saw differentiation across the NCB's. Only seven NCB's submitted plans to allow their banks an expanded pool of eligible collateral. Most core NCB's rejected the opportunity to ease collateral standards (the exceptions being France and Austria).

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TruthInSunshine's picture

Pftttt....give it up, Dalio. Draghi just expressed unequivocal support for doing "whatever it takes to preserve the ," while Merkel was on vaction, and announced that there is definitely going to be a ECB provided 300 billion Spanish rescue package, that will tide Spain over for a few months, coming soon.

camaro68ss's picture

Just print some Euros, offer Batman towels for opening new savings accounts, because batman is way better then spiderman, anounce a plan to make a plan to save the country and call it a day

There, its all fixed

The Monkey's picture

Biderman, um, has has a bad couple of days.

Buckaroo Banzai's picture


Spanish Bonds in Andalucia
Bank parasites in the days of '09
Oh, please, leave the cajas open
all that wealth is now dead and gone
Gaping holes all over balance sheets
The black cars of the Guardia Civil
Spanish bonds dying on the bourses
Draghi's flyin in on an Airbus tonight

Spanish Bonds
Yo quiero mi dinero
Yo Lo quiero, o mi corazon
Spanish bonds
Lo quiero infinito
Yo Lo quiero, o mi corazon

Spanish weeks stretch like months, its a casino
Every bailout died, no magic pill
They sang the Euro flag
Who's gonna hold the bag
After the Euro dies, they'll be feeling ill
Collateral was looked for, went up in flashes
The Irish debt, drenched in blood
Spanish bonds shatter yield records
But my principal is gonna get nipped in the bud

Spanish Bonds
Yo quiero mi dinero
Yo Lo quiero, o mi corazon
Spanish bonds
Lo quiero infinito
Yo Lo quiero, o mi corazon

Hype Alert's picture

All they have to do is announce the ECB will be buying raw sewage in addition to the other BS they've been buying or is it selling?

Osmium's picture

Towels?  i would offer toasters.  I've seen them bithces at Wal Mart go crazy over toasters.

JamesBond's picture

we are at the stage of making a plan to save the plan



sqz's picture


Nice sarcasm. Just in case anyone doesn't get it, the exact opposite is the case, especially "definitely going to be a ECB provided 300 billion Spanish rescue package"...

4shzl's picture

Better still: NATO bonds!!  Yeah, baby -- backed by the full faith and credit of the U.S. taxpayer.  Timmy and Benny are working out the details as you read this . . .

Al Huxley's picture

No fucking way!  When did Spanish banks get into trouble?

Cognitive Dissonance's picture

"Ray Dalio Issues Stark Warning: Spanish Collateral Is Running Already Ran Out Long Ago"

Fixed it for ya Tyler.

disabledvet's picture

You mean "there is no such thing as collateral" now and going forward. Now "buy zee gold" Ray. Ain't no thing.

Dr. Engali's picture

Who needs collateral when Draghi has committed the ECB to printing? It can't be any worse than the crap the fed has on it's books.

sitenine's picture

Yup, and I'm pretty sure Spain has plenty of unencumbered soccer players left to collateralize.

Dr. No's picture

Its a bizzaro world when MBS are marked to face and gold marked at $42/oz.

Nussi34's picture

Get your "Euro? Nein Danke" Sticker on ebay!

franzpick's picture

I like the "Nein-Nein-Nein Plan" sticker.

TPTB_r_TBTF's picture

Euro-Nein Stickers, nein danke.

5 stickers for 3 Euro plus 2.50 for shipping, nein! nein! nein!

You are charging too much.
I'll wait for deflation to set in.

Nussi34's picture

I bought 5. they look really great on an S class, 2 A6 and an X3!

apberusdisvet's picture

For the Rothschild/Rockefeller/Bilderberg/CFR vision of the NWO to survive, all sovereignty must be ceded to Brussels.  The current dog and pony show is merely a distraction.  The only solution is 1. subordinate all fiscal and monetary policy to the ECB.  2. All gold and public utility infrastructure must be used as collateral. 3. Print like there's no tomorrow.

magpie's picture

There is no gold in Europe.

Expect house to house combat in Britain with WMDs to repatriate it to North America and East Asia.

Haager's picture

Spain is soon to discover a new world, they can't be in trouble.

The trend is your friend's picture

"Margin Calls gentlemen..You know the rules of the exchange"

Trading places

ZaphodBeeblebrox's picture

"You know perfectly well we don't have 394 million dollars in cash!" Or euros or collateral . . . Oh and adjusted for insanity and inflation make that 394 billion. Best advice from the Dukes: Sell! Sell! Sell! (except your gold and silver). 

Jlmadyson's picture

Vulnerable to downgrades and margin calls ain't that a B.

And another 1.2 drop in GDP next year!

Greater depression?

kito's picture

dalio feels the u.s. is deleveraging beautifully.........heh???? i guess a bloated federal govt budget that continues to pump borrowed money into the economy to keep the gdp above -5, while soaring past 103% debt/gdp, while keeping the zombie banks afloat through a discount lending window of nearzero percent, all the while destroying the savers and distorting just about every market known to man is considered a beautiful deleveraging?????????????...........

fonzannoon's picture

Kito first off allow me to brush off the red carpet for you. You are dead on correct QE is not coming. After GDP today it is obvious even to me now. But if you believe in the almighty dow, then you know at some point when QE does not come, it's gonna get slammed down. If it gets slammed down there goes your wealth effect. On top of that more people will just check out of the markets for good. How do you reconcile these things?

They can't jawbone and rumor forever. At some point these banks are gonna stamp their feet like a pissed off 2 year old and force the fed's hand.


SwingForce's picture

I don't want to work, I just want to front-run the fed all day. That's all these spoiled-rotten banks wanna do- even PIMCO is busting at the seams waiting for it. And this stimulates the economy how?

Arius's picture

well... more money to spend on cars, airplanes, hookers, coke,... it all trickles down ....

avidtango's picture

Right - because so much economic activity (outside of stocks) has occurred after all the other Fed tricks.    If monetizing a trillion dollar deficit year after year is not QE3, 4 & 5 I don't know what is.

MsCreant's picture

That is the thing isn't it? It is happening, will happen, and cannot stop. What they say and do is two differnt things. How can you know about Li(e)bor, the Fed purchasing treasuries, blah, blah, blah, and NOT know that every back door is hanging wide open greased and ready to take those injections of liquidity right up the...uh...

Dr. Engali's picture

When you can tell me ho they are going to fund a 1.3 trillion dollar deficit without the fed printing then I will buy into QE is not coming. But I have a turkey sandwhich riding on it showing up. There will be some sort of cover provided for the fed, you hear the stories now. Like the drought will drive up food costs, trouble in the middle east will drive up fuel prices...blah blah blah. but they will print. They have to.

fonzannoon's picture

Doc so have you abandoned the idea that the market has to drop in order for QE to happen?

Dr. Engali's picture

I think a market drop would be ideal, but I don't think it is a prerequisite. I think the appropriate cover will be provided for him when the time comes. If all things were equal and forces were allowed to be played out my opinion is we would have a big deflationary event followed by massive printing to catch the falling knife and then huge inflation. But all things aren't equal in these manipulated markets. Just to be clear. I think this market is way over valued and should be shorted, but I won't do it because Ben will rip your face off. I do go short at times and that is when Qe winds down, but after that I'm out.

Dr. No's picture

Congress will fail to come to a tax/budget/austerity/et al agreement (as always) and this will spook the market.  This will then set off a fear of deflation which will then cause text book bernank to start printing to "maintain target rate of inflation".

Hype Alert's picture

The problem is paying Cramer to have a tirade on CNBS shouldn't (note I can't say wouldn't) work this time with the DOW at 13,000+ and the S&P at 1376 and climbing.

RSloane's picture

Fonz, they've been jawboning and rumoring heavily for four years. Its working in their eyes. Its their plan. They're not going to stop now regardless of how many people in the EU, specifically Spain, are out of work and have zero savings.

kito's picture

qe3 may come next year, but bernanke understands the law of diminishing returns.....his hesitancy in lsap stimulus proves that.............along with his increasing rhetoric about the fiscal responsiblities of congress.......he will hold up the dow as long as possible, BUT NOT AT THE EXPENSE OF DESTROYING THE DOLLAR THROUGH PRINTING THE DOLLAR INTO CONFETTI.....................

Caggge's picture

Just have Spain calculate their collateral the same way the banks calculate theirs. That way they can collateral nothing into something.

FreedomGuy's picture

Their collateral is the words of the central bankers and politicians saying "Al will be well with this next plan!". That is the real collateral.

Sofa King Confused's picture

The scheme is playing out just as planned.  The interest on the debt is bankrupting the countries and forcing them to take bailouts backed by their collateral. Meanwhile the banksters sit back and wait for them to default and then swoop in and scoop up their new businesses, properties, mining operations or whatever was put up as collateral.  They having been doing this in Central and South America for years.  That why some countries have started to nationalize oil, gas, gold, silver, electric, water to get them back from the evildoers.  In most cases it works out better for the populations of those countries and makes things much cheaper.

FreedomGuy's picture

I believe Goldman and J.P. and others are playing an inside game, however, not the way you do. You contradict yourself and come up with the wrong solution.

First, governments cannot formally put up private property as collateral. To do that means the government already owns the property. So, if a government comes up bankrupt, theoretically it does not give the "banksters" your home, your mining company or your bank account. IF the company is GM, has a bank bailout, etc where the government has become a propertied coowner it gets more fuzzy. What you suggest is that you need an authoritarian government such as a hard socialist or communist government to take property you say was stolen from the same government.

There is no evidence anywhere that populations are better off with state owned industries. State owned industries always produce the worst products, if any and all innovation stops at the time of nationalization or creation. If what you said was true, the Soviet Union, Cuba and Maoist China would have lead the world in prosperity and efficiency. In fact, all progress stopped at the time of the revolution. Need parts for 1950's cars? Go to Cuba.

Caggge's picture

I agree that the collateral is central bankers and politicians words. They have no skin in the game yet they take a huge cut of the pie or they allow their friends to abuse the system for profit. The middle men who have no skin in the game need to be the ones facing austerity. Let business's say the "words" and allow them to fail if their words aren't true. If they fail because their words aren't true then put them in the crowbar motel.

linrom's picture

The manager of the largest hedge fund in the world - so not some self-perpetuating political mouthpiece


It's a good thing that his name is not Bill Gross, George Soros or Jim Chanos? Makes you wonder if have reached some kind of tradable bottom?

q99x2's picture

HABIT - Hang A Banker I? T?.

Can't figure out the "I" word maybe In Time or In Town.

Inthemix96's picture

Heres a novel plan,

1.  Shoot any and all politicians and banksters on site, no one can be spared.

2.  Problem solved.


Any takers?