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Spanish Financial Sector M.O.U. - Analysis

Tyler Durden's picture




 

Via Peter Tchir of TF Market Advisors,

Spain MOU: I give it a C+ or B-

The devil is in the details and we finally have the Spanish Bank rescue details.

The cost is not mentioned. We do not know the cost of the borrowing or how long it will last for. That ultimately will be key. Short dated, high coupon loans will not help much. Long dated, low coupon loans will help.

The seniority issue doesn’t seem too bad but reading the documentation it looks like it must have been extremely contentious as it can’t help but say it is going to Spain time and again where it was unnecessary.

The other reason the seniority doesn’t look too bad is because it doesn’t look like much money will get doled out. The timing seems far too long. This is a political fix and one where they live in some bankers world rather than a traders world. I am VERY concerned about the long timeframe for implementation. The immediate availability of €30 billion is good, but I have my doubts that it will be distributed.

Concerns about “conditionality” seem overdone. Virtually all of the new conditions apply to the financial sector and many are common sense and things that should have already been getting done. Yes, they include the mention of Spain’s obligations, but that is only briefly mentioned, and by and large is just what Spain has already agreed to (though now maybe there will be repercussions if they don’t meet those targets). In any case, the conditions for Spain seem to only hit in 2014, which is definitely a lifetime away.

The use of a “bad asset” vehicle makes me nervous. I think that adds a level of complexity and risks taking time and using money and resources inefficiently.

So I give it a C- or B+ because it looks like it will take too long to implement, is cumbersome, and no details on the cost are yet available. I think they went out of their way to avoid the subordination issue which is a positive, but offset by the fact that costs aren’t known and we need to see money actually put into the banks.

The rest is my first take as I went through the document.

Conditionality

Well, right in the first paragraph the issue of conditionality is brought to the forefront. “Conditionality will be financial-sector specific and will include both bank-specific conditionality in line with State aid rules and horizontal conditionality”. I admit, I have no idea what “horizontal” conditionality means but I assume it means that some conditionality will apply to the country as well as the banks. The convoluted way of saying that makes me suspicious. Why not just say it? Seriously, what is “horizontal conditionality”?

It goes on to state that Spain has to comply with its commitments under the EDP, etc. That doesn’t seem surprising, but the market was hoping for no conditionality for some reason so it seems disappointed.

Seniority

“assistance will be subsequently taken over by the ESM, once this institution is fully operational, without gaining seniority status”. They actually spell that out. I’m impressed as that is a big step, though I have my doubts about when ESM will come on line.

Recent Economic and Financial Developments and Outlook

Not much to say here, though they do try to carve out the “few large and internationally diversified credit institutions” as still having access to markets.

Key Objectives and Restoring Soundness and Timeline

They give a little “shout out” to the Spanish authorities for taking steps to address the problems.

They are heading down a “bad” bank path, which I never understand. It always seems that the pile of bad assets just grows when you go down that path, but others like the idea and it seems a focus of the strategy.

The belief that some transferring bad assets to some external asset management company is part of their strategy. Is the name “Le Lane de Maiden” taken?

The “first tranche” of €30 billion will be ready this month. Since not all of the conditions will be met, the approval to release looks rigorous but the money will be there, coming from the EFSF. Expect big issuance from the EFSF if they are going to have €30 billion ready.

Then the plan starts to go further downhill. Stress tests are to be completed in second half of September. Banks will then be categorized into need based groups sometime in October. This is starting to drag on. The plan comes with a very nice chart, but it seems to drag on.

The focus is disappointingly on stress tests and good vs bad asset segregation.

At least the document is written with some comic relief. We get two new acronyms though I have to say the Expert Coordination Committee might be the best one yet.

In accordance with the appropriate governance structure established in the Terms of Reference for this exercise, a Strategic Coordination Committee (“SCC”), involving, together with the Spanish authorities, the European Commission, the ECB, the EBA and the IMF and an Expert Coordination Committee (“ECC”) will closely oversee the work carried out by the independent firms. The latter will provide full updates every two weeks to the SCC.

 

There is a lot of spaced devoted to describing burden sharing and recap versus “resolution”. Resolution is just a fancy way of saying shutting the insolvent ones down.

I like the idea that real capital will be injected and that it does appear as though it will be done with care, but I am getting nervous that there is nothing indicating a real desire to see banks grow and create new business. Just turning the banks into better functioning zombies will not help the Spanish economy.

The “AMC” or Le Lane de Maiden will receive what looks like an equity injection from the FROB and then will attempt to issue debt. So there will be leverage on the bad asset side. The transfers from banks to the AMC will be at the “real (long-tem) economic value (REV) of the assets”. I’m assuming that is somewhere in between actual value and book value. Seems like a joke as someone gets to make up a number that these are “really worth”. That seems a direct contradiction about burden sharing as it lets banks sell assets at prices that are artificially high and sticks the assets on a balance sheet that won’t be funded by existing bank shareholders, but by the citizens.

Horizontal Conditionality Explained

It starts with “Spanish credit institutions” having to meet a variety of guidelines and regulations. I assume that most of these are conditions you would want the banks to have as an investor anyways.

Something paragraph about concentrations and related party transactions – not sure if that is good or bad, but the review isn’t until January 2013 so I’m not overly concerned either way.

Another page or so of conditions but focused on credit institutions and frankly they seem reasonable.

It looks like the Banco de España is meant to take some powers currently controlled by the Ministry of Economy. It looks like they are trying to separate the central bank from the government. I assume this is part of the effort to create a Eurozone banking system that is more uniform.

By 2013 there will be no active bankers in the governing bodies of the FROB. Wow, more progressive than our own Fed.

Public Finances, Macroeconomic Imbalances…

Okay, this must be where the conditions get bad. Well it looks like they have until 2014 to meet some deficit targets, and since the percentages of GDP are left blank, it looks like there is wiggle room. At the rate this crisis is evolving, 2014 seems like a lifetime away, and it looks like it is just following the EDP recommendations.

Some of the things Spain is supposed to do, look like it will hurt the housing industry rather than helping it, but some reforms look like ones we could use ourselves – “reduce delays in obtaining business licenses, and eliminate barriers to doing business”.

Programme Modalities and Monitoring

Man, they really like using the word modality in Europe. This part looks bad as it states that “Spain would require an EFSF loan”. Only later do they mention that FROB is involved. This definitely makes it look more like Spain than FROB with a Spanish guarantee.

The programme duration is 18 months. I hope that is the time to allocate the capital and not when the loans are supposed to be paid back. I’m not sure why this would take 18 months, even with the bizarre method they have chosen. A fast injection done over 3 months would give the Spanish economy a much better chance of turning the corner. This is likely to just drag out with weak banks barely staying afloat rather than aggressively pursuing new business.

Lots of monitoring, but the bulk of it seems to be at the financial institution level, though they do mention the Macroeconomic Imbalances procedure and the Excessive Deficit Procedure, but the Excess of 3 Letter Acronyms Pact (ELAP) has not been finalized.

Annex 2 – Conditionality

There are 32 Conditions. Here they are and my quick thoughts.

Measure

Date

OK

Provide data needed for monitoring the entire
banking sector and of banks of specific interest due to their systemic nature
or condition (Annex 1).
  

Regularly throughout
the programme, starting end-July
 

OK

Prepare restructuring or resolution plans with
the EC for Group 1 banks, to be finalised in light of the Stress Tests
results in time to allow their approval by the Commission in November.
 

July 2012 – mid August
 

OK

Finalise the proposal for enhancement and
harmonisation of disclosure requirements for all credit institutions on key
areas of the portfolios such as restructured and refinanced loans and
sectoral concentration.
 

End-July 2012  

OK

Provide information required for the Stress Test
to the consultant, including the results of the asset quality review.
 

Mid-August 2012  

What’s an SLE?

Introduce legislation to introduce the
effectiveness of SLEs, including to allow for mandatory SLEs.
 

End-August 2012 

Seems ok

Upgrade of the bank resolution framework, i.e.
strengthen the resolution powers of the FROB and DGF.
 

End-August 2012 

If you going to have it you need docs

Prepare a comprehensive blueprint and
legislative framework for the establishment and functioning of the AMC.
 

End-August 2012 

OK.

Complete bank-by-bank stress test (Stress
Test).
 

Second half of
September 2012
 

OK

Finalise a regulatory proposal on enhancing
transparency of banks
 

End September 2012  

OK

Banks with significant capital shortfalls will
conduct SLEs.
 

before capital
injections in Oct./Dec. 2012
 

OK, but this should be done already

Banks to draw up recapitalisation plans to
indicate how capital shortfalls will be filled.
 

Early-October 2012  

OK but too far away

Present restructuring or resolution plans to
the EC for Group 2 banks.
 

October 2012  

Not sure why they want BdE to have more power

Identify possibilities to further enhance the areas
in which the Banco de España can issue binding guidelines or interpretations
without regulatory empowerment.
 

End October 2012  

Some consultant will get paid for stating the
obvious

Conduct an internal review of supervisory and
decision-making processes. Propose changes in procedures in order to
guarantee timely adoption of remedial actions for addressing problems
detected at an early stage by on-site inspection teams. Ensure that
macro-prudential supervision will properly feed into the micro supervision
process and adequate policy responses..

End-October 2012  

Create overpaying dumping ground

Adopt legislation for the establishment and
functioning of the AMC in order to make it fully operational by November
2012.
 

Autumn 2012  

Umm, sure

Submit for consultation with stakeholders
envisaged enhancements of the credit register.
 

End-October 2012  

OK

Prepare proposals for the strengthening of
non-bank financial intermediation including capital market funding and venture
capital.
 

Mid-November 2012  

Sure, though why not done already

Propose measures to strengthen fit and proper
rules for the governing bodies of savings banks and introduce incompatibility
requirements regarding governing bodies of former savings banks and
commercial banks controlled by them.

End-November 2012  

OK

Provide a roadmap (including justified
exceptions) for the eventual listing of banks included in the stress test which
have benefited from state aid as part of the restructuring process.
 

End-November 2012  

Political foodfight and crony capitalism?

Prepare legislation clarifying the role of
savings banks in their capacity as shareholders of credit institutions with a
view to eventually reducing their stakes to non-controlling levels. Propose
measures to strengthen fit and proper rules for the governing bodies of
savings banks and introduce incompatibility requirements regarding the
governing bodies of the former savings banks and the commercial banks
controlled by them. Provide a roadmap for the eventual listing of banks
included in the Stress Test, which have benefited from State aid as part of
the restructuring process..

End-November 2012  

Seems like something they should already do

Banks to provide standardised quarterly
balance sheet forecasts funding plans for credit institutions receiving state
aid or for which capital shortfalls will be revealed in the bottom-up stress
test.

As of 1 December 2012  

OK

Submit a policy document on the amendment of
the provisioning framework if and once Royal Decree Laws 2/2012 and 18/2012
cease to apply.
 

Mid-December 2012  

Seems like should be done sooner

Issues CoCos under the recapitalisation scheme
for Group 3 banks planning a significant (more than 2% of RWA) equity raise.
 

End-December 2012  

Again, why the focus on more power to BdE

Transfer the sanctioning and licensing powers of
the Ministry of Economy to the Banco de España.
 

End-December 2012  

Why don’t they already have them

Require credit institutions to review, and if
necessary, prepare and implement strategies for dealing with asset
impairments.
 

End-December 2012  

Seems like wishful thinking and likely to be
lied about

Require all Spanish credit institutions to
meet a Common Equity Tier 1 ratio of at least 9% until at least end-2014.
Require all Spanish credit institutions to apply the definition of capital
established in the Capital Requirements Regulation (CRR), observing the
gradual phase-in period foreseen in the future CRR, to calculate their
minimum capital requirements established in the EU legislation.

1 January 2013  

Good

Review governance arrangements of the FROB and
ensure that active bankers will not be members of the Governing Bodies of
FROB.
 

1 January 2013  

Should always be done

Review the issues of credit concentration and
related party transactions.
 

Mid-January 2013  

Consumer protection? OK

Propose specific legislation to limit the sale
by banks of subordinate debt instruments to non-qualified retail clients and
to substantially improve the process for the sale of any instruments not
covered by the deposit guarantee fund to retail clients.

End-February 2013  

Not sure what this is or why takes 9 months

Amend legislation for the enhancement of the credit
register.
 

End-March 2013  

A year, why not in 3 months? Delays are bad

Raise the required capital for banks planning
a more limited (less than 2% of RWA) increase in equity.
 

End-June 2013  

Same issue – why wait?

Group 3 banks with CoCos to present
restructuring plans.
 

End-June 2013  

 

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Tue, 07/10/2012 - 17:29 | 2603628 MiguelitoRaton
MiguelitoRaton's picture

Greece (and the world) is running a Mafia-style bust-out scheme. Beauty and brains, watch this: http://youtu.be/-kDOOjbP9wo

Tue, 07/10/2012 - 17:32 | 2603638 francis_sawyer
francis_sawyer's picture

I thought I was finished with 'HORIZONTAL CONDITIONALITY' back when I was in my 20's... Is it making a comeback?...

Tue, 07/10/2012 - 17:34 | 2603643 NotApplicable
NotApplicable's picture

Wow, what a lot of wasted effort.

It doesn't take much insight to realize that this "bailout" is an F (as well as all others).

Looks like Muppet food to me.

Tue, 07/10/2012 - 17:54 | 2603696 disabledvet
disabledvet's picture

Purely political I agree. Of course this is Spain..."too big to bail"? More than likely these folks simply don't know what to do at this point. The enormity of the task is beyond imagination anyways. Quite honestly I'm surprised they've done as well as they have...not that Wall Street isn't commanded to "buy on great news about to come out of Europe!" which amazingly these clowns actually do. Simultaneous collapse of Washington and Wall Street coming? Sure is one hell of a hot summer. Good luck finding the food to begin with...

Tue, 07/10/2012 - 17:58 | 2603708 machineh
machineh's picture

'Expect big issuance from the EFSF if they are going to have €30 billion ready.'

Indeed.

Hard to tell from EFSF's publicly available accounting, but EFSF does not appear to have anywhere near €30 billion in cash on hand.

If I were running EFSF, I'd borrow as much, and as fast, as possible, before the inevitable rating cut slams through the roof and explodes inside the headquarters.

Tue, 07/10/2012 - 18:00 | 2603717 sangell
sangell's picture

It does seem as if European responses are always a year late and 1 trillion euros short. Why should this be any different. I might also asked has this MOU actually been approved at the national level, i.e. has Finland said ok.

Tue, 07/10/2012 - 18:01 | 2603719 Ned Zeppelin
Ned Zeppelin's picture

Looks like a lot of bullshit to me.

Jest sayin'

Methinks the German High Court figured out extended delay on ruling on the ESM would get the same result as denying the ESM, without the pointy fingers of blame extended in their direction.  The reason being the same as the fundamental defect in the "Spanish Plan:" the wall of reality is coming quick, and there are no brakes it seems. 

Tue, 07/10/2012 - 18:45 | 2603886 Hype Alert
Hype Alert's picture

When the crash comes, we will all wonder why there was so much distraction with the details.  Seriously, when there is this much debt that can't be repaid?  We need to cut down these trees so we can see the forest!

Tue, 07/10/2012 - 18:56 | 2603920 JohnG
JohnG's picture

Horizontal: Someone's getting fucked.

Tue, 07/10/2012 - 19:17 | 2603988 smiler03
smiler03's picture

If anything has been learnt over the past 4 years (or more) isn't it that we should let the TBTF banks, FAIL?

More bank bailouts, and they're being heralded as the salvation of Spain?

I need a brain transplant I think. my one cell must be getting too old.

Tue, 07/10/2012 - 20:22 | 2604155 JohnG
JohnG's picture

 

 

I should think, as they are literally TBTF, break them up, reinstate Glass-Stegall, bankrupt the "bad parts," and let the markets sort it out.

A pipe dream to be sure, but dreaming hasn't been outlawed (yet).

Tue, 07/10/2012 - 20:35 | 2604185 Not Too Important
Not Too Important's picture

Here's a key point:

"It looks like the Banco de España is meant to take some powers currently controlled by the Ministry of Economy."

Shift more power over the economy and money supply from the 'elected' government and give it to a privately-owned Central Bank. So implementing more 'unified' EU control will be done through 'enhanced powers' of the 'EU member but privately-owned' Central Banks.

Sounds like a great idea to me. Really.

Now where did I put my Prozac?

Tue, 07/10/2012 - 19:18 | 2603993 Catflappo
Catflappo's picture

Yes it sounds like a 'position' (and not a trader's one).

 

I prefer a bit of vertical conditionailty myself, and occasionally diagonal to get the best of both.

 

 

 

 

 

Tue, 07/10/2012 - 20:24 | 2604162 JohnG
JohnG's picture

Yes, diagonal....there can always be more than three! :)

Tue, 07/10/2012 - 19:20 | 2604001 Catflappo
Catflappo's picture

But didn't stocks rally 5% around 9 months ago when the EFSF was established with '440 billion'  (cough, splutter).

So why the fanfare for releasing a poxy 7% of that total!?!?

Tue, 07/10/2012 - 20:19 | 2604147 Conman
Conman's picture

The FT is reporting that

The bailout conditions for Spain’s banks would force any lender taking aid fully to write off their preferred shares and subordinated bonds, according to a draft memorandum of understanding seen by the Financial Times. Banks and their shareholders will take losses before state aid measures are granted and ensure loss absorption of equity and hybrid capital instruments to the full extent possible,” the document says.

Spanish banks have €67bn of subordinated and hybrid debt outstanding, according to Bank of Spain, much of which was sold to retail investors as savings products.

 

Uhm, how is this good? How is this not getting any play?

Tue, 07/10/2012 - 20:24 | 2604164 limor-liemore
limor-liemore's picture

So, is the money again coming from other nearly busted countries like Italy?

Tue, 07/10/2012 - 20:26 | 2604167 limor-liemore
limor-liemore's picture

Is the money partially coming from places like Italy?

Wed, 07/11/2012 - 01:48 | 2605035 Peter K
Peter K's picture

So the EFSF is going to inject money into the Spanish banking sector so that....... they can buy more Spanish debt?

That seems to me to be the point of cleaning up the bank balance sheets. Kind or like a LTRO to the sovereign, but on worse terms. 3-4% loans over 5 to 10 year time horizon.

So the 10yr Spanish debt is trading at 7%, the banks get to offload their bad debt to the State, and this frees up the LTRO funds to purchase ESP govies. 

Yep, that should work :)

Wed, 07/11/2012 - 06:37 | 2605224 mark7
mark7's picture

Americans criticizing an actual bailout plan WHEN they have done NONE, NADA, ZIP for their own BANKS! Your government just reloaded the banks and hoped for the best next time! Oh yeah, that is some "plan"... 

Wed, 07/11/2012 - 06:59 | 2605239 Element
Element's picture

C+ or B-

Seems high-ish Peter.

So everyone gets a stabeeleetee inducing PRIVATE sector job?

I think Steve Keen's idea is better, give everyone the money to pay off their PRIVATE loans.

Unfortunately the banks then still get to keep the trillions in crazy/corrupt loans ...

Well, unless you tax their profits heavily enough to put it right back into Govt coffers ... to pay down the PUBLIC loans and bonds roll-overs, as well.

 

Tell me why not?   Who loses?

Wed, 07/11/2012 - 07:30 | 2605296 mark7
mark7's picture

At least European got a grade unlike Americans who do not even bother returning the homework aka possible bailout plan with reasonable action points.

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