While most of the early action today was driven by a baseless rumor that the ECB would announce some magical recapitalization plan that would put everything back into its normal (by this we mean somehow sustainable) place, the alleged time when Draghi would make such an announcement came and went... and nothing. Instead, the ECB, using the FT as its mouthpiece [10], came out late in the day, however not with news that Europhiles wanted to hear. As a reminder, as part of the proposed Bankia nationalization scheme, Spain would inject Spanish debt into the insolvent entity, thereby allowing it to pledge the debt for ECB repo cash. Or so the thinking went. This was, in effect, Spain's bluff. The ECB has just called it.
From the FT [10]:
A Spanish plan to recapitalise Bankia, the troubled lender, by indirectly tapping the European Central Bank for cash, was bluntly rejected as unacceptable by the ECB, European officials said.
News of the rejection came as Spain faces elevated borrowing costs in the bond markets, tries to persuade investors it can contain problems in a banking sector weighed down by €180bn of bad property loans and, on Tuesday, saw its central bank governor stand down early.
Instead, it seems that the ECB is a fan of the old fashioned type of capital raise: one involving equity, and cash, and none of this newfangled repo monetary ponziness. Of course, the only bank that did try a capital raise by way of a rights offering in 2012 was Italian UniCredit [11]which plunged by nearly half in the days following the announcement as a market test would clearly indicate it was woefully undercapitalized and its equity may well be worthless. This, however, does not seem to bother the ECB:
The ECB told Madrid that a proper capital injection was needed for Bankia and its plans were in danger of breaching an EU ban on “monetary financing,” or central bank funding of governments, according to two European officials
ECB's calling of the Spanish bluff also explains the earlier news of Ordonez' premature evacuation from the Bank of Spain, which we noted:
News of the ECB’s hardline response emerged as the Bank of Spain announced that Miguel Angel Fernández Ordóñez, its governor, would step down at the end of next week, a month earlier than planned. Mr Fernández Ordóñez – known by his initials Mafo, who was appointed by Spain’s previous socialist government – has been subject to increasing attacks from politicians over his failure to prevent the country’s banking crisis.
In summary:
“This is like a game of poker now,” one government adviser said, “and I don’t think Spain is bluffing”.
Well, it is. Because its cards, as explained yesterday, are all merely collateral backed by zombie banks which carry their "assets" at idiotic valuations.
So yes - in the great game of monetary poker, the ECB just called Spain's bluff. Or maybe not. Because paradoxically this may all be simply a means to crash the market, as we have been cautioning since last week, when Citi, correctly [12], said that Crossover would cross over (pun intended) 1000 bps, before the central banks would get involved.
In other words: yes, it is a game of cards, but one which may well have Spain and the ECB on the same side of the table, and now both have checked to Ben Bernanke, who has 3 weeks to decide if the cost of bailing out Europe, and thus US banks, is worth the printing of another $1 trillion.
We can't wait to find out.