Spain Formally Comes A Begging
While the world has known for over two weeks that the Spanish banking system is insolvent and locked out of global liquidity, the country was reticent about formally bowing down to Germany and announcing in proper protocol that it was broke. Until a few hours ago, when Spain's Economy Minister Luis de Guindos Monday sent a letter to Eurogroup President Jean-Claude Juncker, as expected, formally requesting aid to assist with the recapitalization of Spanish banks that need it, the ministry said in a statement.
Market News has details:
De Guindos said the precise form of the aid will be decided taking into consideration "the different possibilities currently available and those that might be decided in the future." The comment seems to suggest that Spain is holding out hope that European leaders will ultimately agree to allow Europe's bailout fund, the European Stability Mechanism, to fund banks directly rather than being required to channel the loans through the government.
Under current statute neither the ESM nor the temporary bailout fund it will be replacing, the European Financial Stability Facility (EFSF), is allowed to inject capital directly into banks. Unless that changes, the bank aid to Spain would add to the Madrid government's debt, with worrying implications for its ability to continue servicing it.
In his letter to Juncker, De Guindos confirmed that Spain's bank restructuring agency, the FROB, would receive the aid funds and distribute them to the banks needing them.
"The Spanish authorities will offer all of their support in evaluating eligibility criteria, in the definition of financial conditionality, in following up on measures to be implemented, and in the definition of the financial aid contracts, with the goal of finalizing a 'memorandum of understanding' before July 9, so it can be discussed at the next Eurogroup meeting," de Guindos wrote.
July 9 is also the date on which the ESM is supposed to become operational, though it could be pushed back several days because of a legal action pending against it in Germany.
De Guindos noted that in deciding the amount of aid required, two independent audit reports issued last Thursday as well another report by the International Monetary Fund would be the starting points.
The two independent audits, commissioned by the Spanish government, showed Spain's banking sector would need between E16 billion and E26.5 billion in a baseline economic scenario and between E51 billion and E62 billion in a "stressed" scenario where economic activity and housing prices fell further than currently anticipated. The IMF reported an aggregate capital need of around E40 billion for Spanish banks. However, the rating agency Fitch, calling for higher core Tier 1 capital buffers than assumed in the two independent auditors' reports, said on Friday that Spanish banks would need up to E60 billion in the baseline scenario and up to E100 billion in the pessimistic one.
Sadly, at this point we can all just sit back and await for the next Spanish bailout letter demanding more cash, because, as we have explained on several occasions, the ultimate funding need of Spanish banks will be well over €100 billion, as further confirmed overnight by another analysis from Open Europe, which notes the patenly obvious: "Up to mid-2015 Spain faces funding needs of €547.5bn, over half its GDP and a large majority of its debt." Good luck:
- The IMF estimates of €40bn for Spanish bank recapitalisation look too low. We estimate that the banking sector needs between €90bn and €110bn, meaning even the expected €100bn rescue package may not be enough. The amount needed could further increase if banks struggle to raise provisions against losses on top of their capital requirements. The external stress tests announced yesterday are equally too low given that they worked from current data, which may be insufficient or incorrect.
- We expect that this package, along with higher borrowing costs, could increase Spanish debt to 94% of GDP in 2013 and 112% in 2015 (with only slightly lower growth than expected).
- This package will intensify the sovereign-banking-loop in Spain as banks come under more pressure to load up on Spanish debt. Unless the far-reaching problems in the Spanish banking sector are resolved – which looks unlikely – further reinforcing this loop could eventually force Spain into a full bailout (as the burden becomes too much for one side to stand). This is something for which the Eurozone’s current bailout fund would not be equipped.
- Ultimately, Spain’s problems are not confined to its banking sector. The state faces funding costs of €548bn over the next three years, as well problems controlling regional spending and encouraging economic growth – all of which, again, makes the risk of a full bailout for Spain more likely.
- Therefore, in order to avoid the plan being counterproductive, stabilising the country’s banking sector in longer requires the right conditions – including ‘bail-ins’ and bank wind downs.
- The ESM will not be in place to provide the funds, meaning that the EFSF will have to. This reduces questions over seniority but will lead to demands for collateral from Finland – a messy issue which could itself prompt seniority concerns.
- We estimate that total exposure of EU countries to the Spanish economy is around €913bn, a huge amount which highlights the vital importance of ensuring that this rescue package works the first time around.
Full briefing below:
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