- Here comes the replay of 2011 as China starts the counter-reflation moves: China Central Bank Reverses Cash Pump (WSJ)
- Security group suspects Chinese military is behind hacking attacks (Reuters)
- Iceland Foreshadows Death of Currencies Lost in Crisis (BBG)
- China Allows More Firms to Sell Mutual Funds to Bolster Market (BBG)
- Uncertainty looms for Italians (FT)
- Forget the big comeback; Detroit focuses on what can be saved (Reuters)
- SAC’s Cohen May Face SEC Suit as Deposition Hurts Case (BBG)
- Hollande wrestles with austerity demands (FT)
- Obama Golf With Woods in Florida Risks Muddling Messsage (BBG)
- Simpson and Bowles to Offer Up Deficit (WSJ)
- Aso Says Japanese Government Not Planning Foreign Bond Buys (BBG) - ... until it changes its tune once more
- Abe to Decide on Bank of Japan Governor Nomination Next Week (BBG)
Just two weeks after Egan-Jones started the party, S&P has downgraded Spain to BBB- (with a negative outlook). As we discussed here when Egan Jones pushed all-in with Spain to CC, of course, Moody's (Baa3 Neg) will likely follow shortly with Fitch (BBB Neg) deciding to avoid the office-raid and keep its French parents happy. The main reasons - and concern going forward, via Bloomberg:
- *S&P MAY CUT SPAIN IF POLITICAL, EUROZONE SUPPORT WANED
- *S&P MAY CUT SPAIN IF NET GOVT DEBT RISES ABOVE 100%/GDP '12-'14
- Doubts over some eurozone governments' commitment to mutualizing the costs of Spain's bank recapitalization are, in our view, a destabilizing factor for the country's credit outlook.
- In our view, the shortage of credit is an even greater problem than its cost.
A month ago, when we first presented the dwindling Spanish treasury cash position, we wrote: "once the next Spanish State Liability update is posted, we wouldn't be surprised to see this number plunge to a new post-Lehman low. Yet what is scariest is that all else equal (and it never is), at the current run rate Spain may well run out of cash by the end of the year even assuming it manages to conclude all its remaining auctions through year's end without a glitch." The August cash balance update was just released by the Banco de Espana, and there's good news, unsurprising news and bad news.
Some hours ago Spain finally bit the bullet, and after months of waffling had no choice but to hand over €4.5 billion (the first of many such cash rescues) in the form of a bridge loan to insolvent Bankia, which last week reported staggering losses (translation: huge deposit outflows which have made the fudging of its balance sheet impossible). As a reminder, in June Spain formally announced it would request up to €100 billion in bailout cash for its insolvent banking system, which subsequently was determined would come from the bank rescue fund, the Frob, which in turn would be funded with ESM debt which subordinates regular Spanish bonds, promises to the contrary by all politicians (whose job is to lie when it becomes serious) notwithstanding. And while Rajoy has promised that the whole €100 billion will not be used, the truth is that considering the soaring level of nonperforming loans in Spain - the biggest drain of both bank capital and liquidity - it is guaranteed that the final funding need for Spain's banks will be far greater. As a further reminder, Deutsche Bank calculated that when (not if) the recap amount hits €120 billion, Spanish total debt/GDP would soar to 97% in 2014 from an official number of 68.5% in 2011 (luckily the endspiel will come far sooner than that). But all of that is well-known, and what we wanted to focus on instead was the fact that bank bailout notwithstanding, Spain will have no choice but to demand a full blown rescue within a few short month for one simple reason: its cash will run out.
We recently discussed Guggenheim's 'awe-full' charts of the level of central bank intervention from which they noted that the Fed could lose 200 billion US$, when inflation comes back again. Interest rates would increase by 100 basis points and the US central bank would be bankrupt according to US-GAAP. We explain in this post the differences between money printing as for the Swiss National Bank (SNB), the ECB and the Fed. We show the risks the central banks run when they increase money supply, when they “print”. As opposed to the ECB, the SNB only buys high-quality assets, mostly German and French government bonds. However, for the SNB the assets are in foreign currencies, for the big part they are denominated in euros. Further Fed quantitative easing drives the demand for gold and the correlated Swiss francs upwards. Sooner or later this will pump more American money into the Swiss economy and will raise Swiss inflation. For the SNB these two are the Mephistos: Bernanke and Draghi, the ones who promise easy life based on printed money.
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As was leaked earlier today, so it would be:
- MOODY'S CUTS 16 SPANISH BANKS AND SANTANDER UK PLC
- MOODY'S CUTS 1 TO 3 LEVELS L-T RATINGS OF 16 SPANISH BANKS
- MOODY'S DOWNGRADES SPANISH BANKS; RATINGS CARRY NEGATIVE
In summary, the highest Moodys rating for any Spanish bank as of this point is A3. But luckily the other "rumor" of a bank run at Bankia was completely untrue, at least according to Spanish economic ministry officials, so there is no need to worry: it is all under control. The Banko de Espana said so.
The only good news spin this morning was that the Greek, pardon Spanish contagion, has not reached Italy, after the boot-shaped country sold €5.25 in bonds this morning at rates that did not indicate a meltdown just yet. It sold its three-year benchmark at an average 3.91 percent yield, the highest since January but below market levels of around 4 percent at the time of the auction. It also sold three lines due in 2020, 2022 and 2025 which it has stopped issuing on a regular basis. And this was the good news. The bad news was the not only has the Spanish contagion reached, well, Spain, but that everything else is now coming unglued, as confirmed first and foremost by the US 10 Year which just hit a new 2012 low of 1.777%. Spain also is getting hammered with CDS hitting a record wide of 526 bps overnight, and its 10 Year hitting 6.26% after the country sold 364 and 518-Day Bills at rates much higher rates than on April 17 (2.985% vs 2.623%, and 3.302% vs 3.11%). But the highlight of the day was the Banco de Espana release of the Spanish bank borrowings from the ECB, which to nobody's surprise soared by €36 billion in one month to €263.5 billion, more than doubling in 2012 from the €119 billion at December 31.
And how can it not be? As Banco de Espana just released earlier today, Spanish banks have borrowed a record €152 billion in February, a €19 billion increase from January. At least we now know what the capital shortfall was in Spain since pre-LTRO days, when total borrowings were €98 billion: "LTRO is for carry trade purposes"... right. So thank you European tax payers, and the 'bad bank' hedge fund formerly known as the ECB - you just bought Spain a few more months, however with your actions you guaranteed that nobody will change any part of their destructive behavior, and merely enable even more solvency crises in the future, which will be band-aided with even more trillions in free money, and so on, until the global central banks need to show their expansion not on a weekly but millisecond basis. And oh yes, this explains why Blackrock is tripping over itself this morning recommending Spanish bonds, which "may offer opportunities for long-term investors" - perhaps the same profit opportunity that the ECB had on its Greek bond holdings purchased at 80 cents of par and collapsed at about 20.
Spain is next...