Spain's Debt Buyer Of Last Resort Becomes Seller In Scramble To Fund Deposit Outflows

Tyler Durden's picture

Several days ago we reported that Spanish financial institutions suffered the largest deposit outflow on record in the month of July when a whopping EUR74 billion, or 5% of the country's entire asset base, picked up and left, the bulk of it most likely taking the well-known path of least resistance to the safety of Swiss and German bank vaults. We showed how this looks visually, and as the chart below confirms it can be summarized in one word only: waterfall.

And while in isolation this news was bad enough, a far more troubling implication arises when one considers that in Europe's financial Ice-9 world, in which the interbank market has been dead for over a year, and where the ECB is the shadow lender of only resort, providing funding via various repo channels to local banks to fund Spain's deficit by purchasing sovereign bonds in the primary market. To wit: since the entire financial system's liabilities (deposits) just declined by a record EUR74 in one month, since the consolidated balance sheet has to balance, either Spain's (thoroughly insolvent) banks had to generate EUR74 billion in shareholder equity in one month, i.e. profits - a prospect which is rather amusing considering Spain's banking system recently officially demanded a European bailout, or banks had to sell a like amount of assets in order to fund this outflow. Naturally, they chose the latter. The problem is that the security they sold is the one which only the banks have been buying recently in order to preserve the illusion that Spain is solvent. It was Spanish sovereign bonds.

Reuters reports:

Spain is beginning to lose the support of its banks as last-resort buyers of government debt, with lenders selling out of their holdings at the fastest pace in more than two years in July, ratcheting up pressure on the European Central Bank to step in and put an end to the country's burgeoning debt crisis.


The sales are a blow to Madrid, which was increasingly reliant on domestic banks to buy its debt after an exodus of foreign investors. Domestic lenders, under political pressure to support the sovereign, used cheap loans from the ECB to buy an extra EUR87bn of debt between December 2011 and March this year.


But that support has begun to ebb, with Spanish banks selling over EUR17bn of debt since then, according to ECB data. In July alone, domestic lenders reduced their holdings by EUR9.3bn, in part to meet an outflow of deposits, signalling that money is now too tight to support the sovereign.




Spanish banks are facing problems of their own. Data released last week showed that customers withdrew EUR74bn of deposits in July alone - equivalent to 4.7% of total deposits and the biggest monthly outflow since records began. Since June last year, clients have withdrawn EUR233bn, or 13% of the total then.


A need to raise cash to meet those withdrawals may have prompted the recent bond sales, as other assets owned by banks - mainly loans and mortgages - are far less liquid. Spanish bank bond holdings are dominated by Spanish government debt, but also include those of other countries.

Furthermore, as the chart below shows, the supreme irony is that Draghi's biggest enemy in the fight to preserve the illusion of Spanish solvency, is Spain itself, and specifically its depositors, whose bank jog suddenly becoming a sprint, is the worst thing that Spain, and the ECB, can possiby face. Indeed, since Draghi's "whatever it takes" speech, Spanish bonds have roundtripped and are now virtually unchanged. The primary culprit? Spanish banks forced to sell the bonds they bought in the primary market.

As a reminder, while Mario Draghi is furiously trying to come up with a bond buying plan that is endorsed by Germany, Buba and Weidmann, all of whom have, to date, said, "9-9-9", regardless of what the final construct is, whether it includes the ECM, EFSF, and/or ECB buying bonds directly, the key distinction is that no monetary authority can buy bonds in the primary market, as that is a direct breach of Article 123/125, and absent a thorough revision of the Maastricht Treaty, investors will dump as soon as the ECB starts breaking the rules unilaterally. Certainly bonds can be monetized in the secondary market, but someone has to buy them from the government. And if Spanish banks are unable to stem the deposit outflow, there is simply no practical possibility for banks to be buying SPGBs in the primary market even as they are forced to dump them in the secondary market.

In other words, the ECB may or may not surprise next week, but unless the Spanish public is convinced its banks are safe, and the remaining EUR1.5 trillion in Spanish deposits do not explicitly remain within the Spanish bank system, anything Draghi does will be for nothing.

Finally, add to this the surge in Spanish bad debt, which as we reported recently soared to an all time high: NPLs which will have to be provisioned for with cash-hungry charge offs, and one can see why suddenly from a perfect summer, Spain may head straight into the perfect storm.

Spanish loan delinquencies bad and getting worse in a hurry...

And with the August vacation now in the rearview mirror, here is why should the deposit outflows persist, Spain may have a problem or two funding itself now that the peak of its gross issuance is upon us:

  • 6 September: Spain auction. Bonds
  • 18 September: Spain auction. Bills
  • 20 September: Spain auction. Bonds
  • 25 September: Spain auction. Bills
  • 4 October: Spain auction. Bonds
  • 16 October: Spain auction. Bills
  • 18 October: Spain auction. Bonds
  • 23 October: Spain auction. Bills

Graphically, supply is set to rise significantly in September and October for Spain:

And even if all works out in 2012, it is all downhill from January 1, 2013. As UBS explained:

Even assuming that the Spanish Treasury sticks to its original funding plan of EUR 86bn, the Tesoro will need to continue to sell around EUR 6bn of bonds per month. Monthly net issuance should average nearly EUR 3bn. Moreover, gross issuance could potentially rise to around EUR 8bn per month and total net issuance could reach EUR 13bn if Spain adjusts for the increased net-borrowing requirement.


Considering that Spain usually carries out two auctions per month, this would imply an average issuance of around EUR 4bn per auction. The last time Spain was able to sell such an amount at a single auction session was in early March. Monthly supply has ranged between EUR 5-6bn since April (we exclude the first three months of 2012 when Spanish supply was largely supported by the two 3Y LTROs). Since that time, Spanish banks’ capacity to absorb new government paper has deteriorated.


In our view this should continue to keep Spanish bonds under pressure each time supply approaches, making Spain very vulnerable to a possible loss of market access should other adverse domestic economic factors or events cause demand to fall even further.  


Spain’s situation is even more worrisome when looking at next year’s funding requirements.


In 2013, Spain will need to refinance around EUR 60bn of maturing Bonos and Obligaciones while issuing an additional EUR 45bn to cover its public deficit. In this analysis, we assume that the government’s targets for next year are reached. This amount needs to include the funding for the deficit of local administration since regional issuance is unlikely to resume next year. Similarly, the central government very likely will need to cover the EUR 15 billion of Spanish regional debt maturing in 2013, which as it stands now cannot be otherwise refinanced. Additional central government funding may also need to be provided for maturing Spanish international and agency debt such as FADE bonds for a further EUR 3-4bn.


All in all, the total amount of gross bond issuance from Spain in 2013 could be in excess of EUR 120bn. That is around 40% higher than this year, 10-20% higher than in 2009 and almost four times larger than the average amount of Spanish bond issuance recorded in the previous four years.


Perhaps at this point the only thing that can save Spain now that the 1 month respite from reality is over, is fast forwarding straight to the Christmas break, and the inevitable LTRO X, which the ECB will have to do in order to provide additional funding to Spain, which unlike before, however, will no longer work as Spain and the rest of Europe, are out of eligible collateral, meaning the ECB will have to get the Buba to agree to even more last minute rule changes to keep Spain "solvent."

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MiltonFriedmansNightmare's picture


This central planning thing is apparently a bit trickier than first estimated.

THX 1178's picture

All metrics seem to be tending toward one thing. Brace for it.

GetZeeGold's picture



Brace for it.


Crap.....this is gonna hurt!


THX 1178's picture

Crap..... this is gonna hurt!

Yes, consult Mr. Banzai's graphic below.

Newsboy's picture

Spanish Bombs, The Clash

Look for the little girls with the rifles in the pre-Wikileaks newsreel.

jekyll island's picture

Who is buying all the bonds the Spanish banks are selling?   

grid-b-gone's picture

We have no idea how deeply our unaudited Fed has mired itself (us), counter to its operating charter, in the whole European mess.

To what degree did they go joint and several after Timmy did his world tour to talk them out of austerity?

I'll be the first to admit Bernanke is the master if his mathematical formulas somehow ease us out of this without a total reset, but if QE did not work, what is so special about "unconventional easing?"

Who knows, we're controlling a robot on Mars and are about ten years away from routinely creating replacement human organs. Machines are close to inventing machines and taking mankind into a hyperdrive rate of creation. Maybe we are on the cusp of transcending the laws of supply and demand, and controlling fear and greed from a centralized point.

I don't enjoy my lack of economic faith, but until I see the wounds for myself, I'll continue building a defensive personal plan.

Things that go bump's picture

They even use robots in many surgeries now.  

repete's picture

"All metrics seem to be tending toward one thing. Brace for it"

can't help but affect imperial units at some point as well!

timbo_em's picture

It gets even more tricky when one considers the Spanish autonomous communities. Katalunia and Valencia admitted they are broke and need close to 10B euro from the Regional Liquidity Fund (FLR). And that is only for 2012!!! Others to follow. However, the fund has only a total of 18B and is backed by the central government and the national lottery. Charles Ponzi would be so proud. Almost needless to say that in line with the central government the regions/communities are also 'slightly' off-track when it comes to deficit reduction.

LibertarianX's picture

WB7 - So good and so bad...ouch!

Maybe Santander could use this in their UK bank.....I wonder if any uk customers feel nervous yet...?


GetZeeGold's picture



It was a one in a million shot.......who knew?


Dr Benway's picture

They told us that our hero has played his trump card, he doesn't know how to go on

We're clinging to his charm and determined smile, but the good old days are gone

The army and the empire may be falling apart, the money has gotten scarce

One man's word held the country together, but the truth is getting fierce

falak pema's picture

Shiva is worse. He says : Now that karma has done this I can fill it with good ole spice. Imagine the pain. I think Draghi is Shiva. He will fill those cornadaed banks with vanishing money. Bank runs need money to run away with. The more he pours in the more the country takes on as public debt, the more the oligarchs run away with as private profit. Well played Shiva. 

"We are bankrupt and need ECB tutoring."... Then Spain becomes Greece and the golden fleece goes to...Italy! 

Rinse and repeat Draghi; umm Shiva! 

LongSoupLine's picture



How cruely ironic that it's a "bull"...

Clever Name's picture

El toro, stealithily creeping up on its unsuspecting victim, then BAM! Right in the cornhole!

Oh the horror!

jekyll island's picture

The horn is anterior to the cornhole.  The original story that went with this picture described the matador's injuries as "horrendous."

Urban Roman's picture

It was an instantaneous change from 'el torero' to 'la torera' ?

ptoemmes's picture

Instead of Spyder Man towel inducements perhaps Spanish banks could offer slightly used toreador capes.


falak pema's picture

How about this :

According to Le Figaro Spain is selling off its residential tourist RE at 60% discount !

Le Figaro - Flash Eco : Espagne/immobilier: des rabais de 60%

Debugas's picture
"Un appartement de deux chambres, qui coûtait avant 400.000 euros, est désormais proposé à 250.000"

It is still too expensive

Ricky Bobby's picture

Situation Normal All Fucked UP

SNAFU Bitchez!

MillionDollarBogus_'s picture

Cash moved from a Spanish bank to a German bank will sit in a vault..??


The cash will go straight back to Spain to buy new debt.  

I sold my PM's and am betting on big returns in short term Spain bonds.

Thanks, Monti...


AUD's picture

The Bogus has a point here. The Spanish cash deposited in German banks can be loaned, with some sort of ECB 'guarantee', to Spanish banks, which buy new Spanish debt, which is then flipped to the ECB......

Runs on deposits might cause an increase in the 'notes on issue' liabilities of the ECB relative to total liabilities, as more people move into physical cash, but I can't see this can not being being kicked further. At least as long as ECB liabilities are 'money good'.

I didn't sell any PM's, that I may or may not have, though.

Sofa King Confused's picture

Somebody pull the trigger, I'm tired of waiting for the big reset

AUD's picture

Start treating the liabilities of government & their central banks for what they are... junk.

andrewp111's picture

The big reset won't happen until no one expects it anymore and everyone is snoozing.

grid-b-gone's picture

When the asset base of a country is leaving in 5% chunks, the reset has been triggered.

When this begins to happen with the world's reserve currency, the reset will be in full force. 

Got leadership?

epwpixieq-1's picture

The only small problem, with this ( and I am not saying that it will not happen ), is that ECB dose not have the way to spread inflation all over the world as FED has.

So the more they monetize, in any form and way, the more prices will spike in Europe, and this for certainty will have a quite-wide-spread mass disturbances, with following crash of any political system. And one is certain, the Europeans are extremely sensitive to any price increases due to their painful ( and very vivid, especially in Eastern Europe ) inflationary-economics history lessons. That, for ones, is an extremely powerful common bondage across the Pan-European plane.

grid-b-gone's picture

Yes. This is why austerity was their last viable chance to limit the pain to only contained paychecks and reduced social services.  

LawsofPhysics's picture

Right, because liquidity traps always work out so well.

Maybe germany will offer spain a loan with negative interest rates.  Hell, I would take out another business loan if the bank is going to pay me to do it. 

Not even a weak attempt, come on MDB, I know you can do a lot better.

fonzannoon's picture

Is that milliondollarbonus milliondollarboner or milliondollarbogus? We need a milliondollarbonehead..

Non Passaran's picture

great points.
after that helicopter crash I remain cautiously pessimistic and expect handsome return on my short positions.
next week could be riot!
bring it on!

eigenvalue's picture

Helicopter Crash? If there had been a helicopter crash, why had all the markets been green? If Draghi offers some surprise next week and Germany's Constitutional Court gives the green light to ESM the week after, your shorts will be blown up... Even if the Fed disappoints in 2 weeks, the prayer for QE3 in November will begin instantly. It's a bull market. Fundamentals matter no more.

Hype Alert's picture

Exactly, The Great Lie will continue.  They will not let the markets adjust naturally and will do anything and everything to keep kicking the can, otherwise the ponzi gets exposed.  Every time the markets start to adjust, somebody somewhere gives a speech declaring they will fix this and by that they mean print.  This is why I don't think we need to study The Great Depression, no, we need to study Zimbabwe and Weimar Republic stock market charts.  That's the only conclusion since they've chosen to stimulate with monetary policy instead of addressing the fiscal policy. 


Look at it this way, the government is giving all power (and responsibility) for fixing (wallpapering over) the government's screw-ups over to the FED.  This takes attention away from the real source of the problem, the government itself. 

SeattleBruce's picture

"This is why I don't think we need to study The Great Depression, no, we need to study Zimbabwe and Weimar Republic stock market charts."

Or perhaps Japan of the last 20 years - at least for a while.  Which bring us to this:

Japan plans to cut state spending, could run out of money in a month
AG BCN's picture

And don't forget that the VAT/IVA just increased from 18% to 21% from today here in Spain. Good job I cleaned out my local Barcelona coin shop of all it's Silver Eagles some years back. 

blabam's picture

I would be getting the hell out of Spain if I lived there. 

AG BCN's picture

It's actually a good place to live if you have taken the right steps to protect yourself. 

withnmeans's picture

Your right, it is a great place, however if your not a farmer "or have an abundance of food stored away" I would consider getting out as well.

With the new taxes being implemented "i.e. Huge Austerity " people will no longer have the money to purchase near as much, we will see sales drop and stores close. Most are hanging on by a thread now, lets see where this gets them.

Good Luck Spain !!!

davenpuerto's picture

Agree - Still a great place to live, but we live in Catalonia, which is rich compared to other regions.
Going to be interesting here on the 11th - La Diada -  National Catalonia Day...

AynRandFan's picture

Excellent article.  It is this kind of coverage that is so valuable when trying to cut through the obscuring fog generated by government and quasi-governmental entities.

eigenvalue's picture

The analysis is flawed. Spain can still ELA to absorb the SPGB issuances. Even Greece can use ELA to manage to finance its government through treasury bills. Why can't Spain use ELA to kick the can farther?

machineh's picture

Indeed. And there are other options as well. Here's the quote:

Bonds can be monetized in the secondary market, but someone has to buy them from the government. And if Spanish banks are unable to stem the deposit outflow, there is simply no practical possibility for banks to be buying SPGBs in the primary market even as they are forced to dump them in the secondary market.

So what if banks withdraw from the primary market? That still leaves primary dealers (hello, Goldman Sachs!) and hedge funds to flip newly-issued bonds to the ECB for a profit ... as in QE II in the U.S., exhaustively covered here at ZH.

One can't just treat the shadow banking sector as if it didn't exist.

Schmuck Raker's picture


"One can't just treat the shadow banking sector as if it didn't exist."

...until it doesn't?

Tic toc tic toc