Spain's banking system bailout is quickly becoming farcical. According to the WSJ this evening [9], Spain is to require its banks to set aside more provisions (between EUR20 billion and EUR40 billion) in an effort to overhaul the country's financial sector. This additional need for reserves (or provisioning) puts yet more pressure on the banks' balance sheets as it comes on top of the already EUR54 billion that has been set aside from February. Interestingly the EUR20-40 billion still falls dramatically short of Goldman Sachs' estimate of an additional EUR58 billion that is needed to cover reasonable loss assumptions. We can only assume that the game is to create as large a hole as is possible without tipping the world over the brink and then fill it with the state funds a la TARP (as Rajoy has indicated will be the case). It is fascinating to see us drift from the 'denial' phase to the 'recognition' phase slowly but surely (though still miserably under-capitalized) with the amazing arrogance that given the state is the only entity capable of issuance it will fund these shortfalls. So, in a nutshell: the Spanish banks got EUR352 billion (via LTRO and loan repayment) and are left with only EUR80 billion (after deposit outflows and sovereign reach-arounds); did not use this low risk-premium period to raise capital on the public markets; are now seeing the holes in their balance sheets exposed as being bigger by the week; but will be 'fulfilled' by a sovereign's issuance of debt to inject into an ever-increasing black hole of residential and developer loan delinquencies in Spanish banks. Way to go Rajoy - ECB's LTRO carry trade tied the banks more closely with their sovereigns and now the sovereign is directly involved with the banks - this will all end well, we are sure.
From UBS - Where the money goes in Spain
In Chart 21 we update the chart of the sources and uses of incremental funding in Spain in recent months.
[10]
The rise in ECB use of €270 billion since June 2011 has been met with a fall in loans outstanding of €82 billion, by our estimates (€64 billion reported to February then the same rate of decline in March and April). Uses of funds have included:
- The €52 billion excess of maturities over debt issuance;
- A reduction in private market repos of €74 billion to February
- An outflow of deposits of €55 billion to February, assumed to have continued at the same pace to April
- And the €60 billion rise in government bond holdings over June-January, with an assumed increase in March and April in line with the prior monthly run rate
This leaves the system with €80 billion yet to be used. We believe this significant sum could be a support for the government bond market in the near term. However, we also see the elevated ECB use overall making it less likely the system (and, by extension, the sovereign) will be able to return to the public markets in sufficient size to meet maturities and incremental issuance from non-domestic, non-official sources in coming months.
And from Goldman Sachs - Comparison of Goldman's and Royal Decree Law (Spain's) loss estimates from February:
[11]
We can only assume that in some insane world, the remaining EUR80billion of LTRO on the Spanish bank's books will ponzi itself into buying Spain's newly issued debt providing Spain with the cash to fund the shortfalls in capital that Goldman (and now even Rajoy) is realizing are gaping wider.
Who else do they think is going to buy that debt to fund this bank bailout?
Is it any wonder that Spanish spreads are near record wides once again:
[12]
But have no fear for they plan on announcing a bad-bank to remove impaired assets from the banks books and place them in some SIVs (yet more asset depletion at the banks and balance sheet encumbrance for Spain).