Spain Tries To Preempt the Conditionality Debate

Many observers agree that Spain has the rest of the euro area, specifically paymaster Germany,  over a barrel: if it were to leave the common currency in order to inflate itself back to prosperity, as ruinous as such a decision would likely prove to be, it would probably precipitate the end of the euro.

This is apparently also the opinion of Spain's government. After having dawdled since the GFC and having failed to seriously deal with its insolvent banks and the implementation of a rigorous economic reform program, the Rajoy government now is trying to preempt the ECB by issuing demands regarding the shape and form of its upcoming bailout.

 

As Reuters reports:

 

“The European Central Bank must take forceful and unlimited steps to buy sovereign debt to help Spain reduce its refinancing costs and eliminate doubts over the euro zone's future, Spain's economy minister said in comments published on Saturday.

"There can be no limit set or at least (the ECB) can't say how much they will use or for how long," when it buys bonds in the secondary markets, Luis de Guindos told Spanish news agency EFE.

The Spanish government will study the details of the ECB's debt-buying program, which are likely to be outlined before the Eurogroup meeting mid-September, before making a decision on applying for more European aid, de Guindos said.

[…]

In response to a renewed intensification of the debt crisis, ECB President Mario Draghi said on August 2 the ECB may buy more government bonds, but only once countries had turned to the bloc's rescue funds for help and agreed to strict conditions.

"I believe Spain has presented its budget adjustment program and its structural reforms, which from a general point of view, have been accepted as sufficient and appropriate," de Guindos said.”

 

(emphasis added)

In other words, what they want is an unlimited bailout in the form of central bank buying of their bonds (naturally this is will be done with money created ex nihilo), with absolutely no conditions attached, on the grounds that the steps taken thus far are already more than enough. This is obviously an opening gambit to the upcoming talks in mid September, designed to make it perfectly clear to those insisting on conditionality that Spain doesn't intend to give up control over its fiscal policy in exchange for the bailout.

There have been several occasions when Spain has had its way in the past – recall for instance the EU's back-pedaling on the deficit targets. Very likely a lively debate took place behind closed doors, garnished with threats.

At the same time, German news magazine Der Spiegel reported on a putative ECB plan to set caps on peripheral interest rates (which once again would only work if the central bank threatened to engage in unlimited buying of the debt concerned). This was immediately denied by the ECB itself, with the somewhat cryptic remark that it was “absolutely misleading to report on decisions which have not yet been taken and also on individual views, which have not yet been discussed by the ECB’s governing council”.

The remark is cryptic because it is not a clear no –  however the German government let it be known that it too was unaware of such a plan, with a finance ministry spokesman saying that “In purely theoretical, abstract terms, such an instrument would certainly be very problematic. But I know of no proposal along these lines”.

In 'purely theoretical, abstract terms'?

Then the German Bundesbank chimed in via its monthly report, reiterating its opposition to all kinds of sovereign bond buying by the ECB, regardless of 'conditionality' and whatnot. Some of the words from the Bundesbank's missive are worth quoting:

 

Decisions on whether to share solvency risks much more widely should be taken by governments and parliaments."

“The Bundesbank holds to its opinion that government bond purchases by the Eurosystem in particular are to be seen critically and are linked to considerable risks to stability."

Moreover, “moves to create a single euro-zone banking regulator, as envisaged by the European Commission, shouldn't transfer solvency risks among member states via aid for banks.”

 

It couldn't be any clearer that Jens Weidmann is almost as implacably opposed to the central bank straying into the fiscal realm as his predecessor Axel Weber was. The big question is whether this means he will simply continue to be outvoted at the ECB, or whether Germany's political leadership is already sawing on the limb he has climbed out on. Although German ECB board member Jörg Asmussen insists thatNobody should try to create the impression that the Bundesbank or its president are isolated, Weidmann sure does look isolated at this point.

The rumors and denials yanked both interest rates and stock markets to and fro in European trading on Monday – which is actually business as usual in the euro area.

 


 

Spain's 2 year note yield on Monday – yanked around by rumors and denials – click chart for better resolution.



 

Spain's NPL's Soar, Banks Run Out of Collateral

Meanwhile, now that it has been decided that the euro area's bailout mechanisms will pay for the clean-up of the Spanish banking system, NPL's have begun to jump higher in a rather impressive increment and have finally reached the long expected all time high, clocking in at 9.42% of all outstanding loans as of June.

 


 

A long term chart of Spain's NPL's via Scott barber of Reuters. A new all time high of 9.42%, while 'doubtful' loans are approaching 25% – click chart for better resolution.

 


 

Concurrently, the borrowings of Spain's banks from the ECB have soared to a new all time high of €411 billion as at the end of July – and the banks have now finally run out of collateral to pledge. Reuters reports that 'Spanish banks are next for a Greek-style ECB shakedown', in reference to the growing use of 'ELA' (emergency liquidity assistance) en lieu of normal ECB funding. 

In this manner the ECB shifts the risks back to the Bank of Spain and ultimately the sovereign – in theory, anyway. One should not lose sight of the fact that what the Bank of Spain does when it extends ELA funding is that it prints euros and not pesetas. Therefore it would be more realistic to call this a risk borne by all users of the euro, as a future write-off of the assets the BoS gets in return for extending these funds could potentially leave the newly printed money stranded in the economy. These assets are little more than IOU's issued by the banks themselves, although sometimes imbued with a government guarantee. In Greece's case the guarantee is issued by an insolvent government. In Spain the same could soon be the case.

Something that is often overlooked when discussing Spain's NPL's as a percentage of outstanding loans is how big the credit bubble actually was and how much bigger therefore the amounts involved are compared to the 1994 peak in NPL's. This can give us an idea what the only just beginning deleveraging phase of the credit bubble will actually entail. Not to forget, NPL's remain a moving target, as both residential and commercial real estate prices continue to decline. As the FT reports, transaction volumes in commercial property markets in both Italy and Spain have collapsed by over 90% in just the past three months.

 


 

A long term chart of Spain's NPL's in billions of euros, via Querschüsse.de – click chart for better resolution.

 


 

Private Sector Credit Growth Goes into Reverse, Bank Balance Sheets Expand Anyway

The credit bubble in Spain has finally begun to deflate – private sector bank credit growth has turned negative in recent months. It may be a long and thorny road before the deleveraging process is finished.

 


 

As of June, the cumulative decline in private sector loans stood at €54.3 billion (via the WSJ)

 


 

To put this decline in private sector credit into perspective relative to the amount of credit extended during the boom, a look at a long term chart is once again instructive:

 


 

Total bank credit extended to the private sector in Spain – as can be seen, the 1993-1994 credit crisis did not lead to any deleveraging at all. This time, things are different and given the likelihood that up to a quarter of the credit outstanding is unsound, there may be a long way to go indeed  (chart via Querschüsse.de) – click chart for better resolution.

 


 

Interestingly though, the balance sheets of Spain's banks have not shrunk – instead they have actually reached a new all time high in June. How can this be explained? The only reasonable explanation we can think of is that Spain's banks have bought so many government bonds this year that the extension of credit to the government has handily exceeded the negative growth in private sector credit.

Spain's bank assets in total now amount to over 400% of nominal GDP, having risen to €4.33 billion in total.

 


 

The balance sheets of all reporting MFI's in Spain have reached a new all time high – bank assets amount to over 400% of Spain's GDP – click chart for better resolution.

 


 

Investors Are Hearing What They Want to Hear

In his weekly missive John Hussman has pointed out in the context of Angela Merkel recently reiterating her support for the ECB's plan,  'investors have stopped actually listening for fact, and are increasingly hearing only what they want to hear'.

If you still require proof that in the short term, market action is driven by perceptions and sentiment rather than reality, here it is. It is worth quoting again what Mrs. Merkel said in Ottawa in toto:


The European Central Bank, although it is of course independent, is completely in line with what we’ve said all along. And the results of the meeting of the central bank and their decisions, actually shows that the European Central Bank is counting on political action in the form of conditionality as the precondition for a positive development of the Euro.”

 

(emphasis added)

Does this sound like 'unlimited bond buying without preconditions' to anyone? No? Investors seemed to think that is what it meant. We see no painless way out for Spain, regardless of what ultimately happens. Even if the ECB were to act without conditionality or limits, it could not possibly alter the underlying solvency problems –  and this isn't going to happen anyway. So what are markets currently pricing in? Everybody seems quite certain of a happy end at the moment. The bet is that massive central bank intervention is heading our way in the near future and will boost asset prices further. This is a mindset that has very likely set up the markets for disappointment.

 


 

Positioning of speculators in US stock index futures (all index futures, weighted) shows the biggest net long exposure in more than a year – click chart for better resolution.

 


 

Meanwhile, one likely source of second thoughts remains China, the stock market of which has just fallen to a new post-bubble low:

 


 

The  Shanghai Composite stock index continues to grind lower – click chart for better resolution.

 


 

 

 

Charts by: BigCharts, querschüsse.de, WSJ , Reuters, Sentimentrader


 
 

Emigrate While You Can... Learn More

 
 

 

Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

5 Responses to “The Spain – ECB Vaudeville Show”

  • therooster:

    Slicing and dicing fiat based debt with new debt amounts to being stuck on the karmic wheel for eternity. The expulsion of debt is what’s called for …. elimination, not re-distribution. Enough with the financial musical chairs ! Grass roots monetization of precious metals adds liquidity to the economy without adding to existing debt. That frees up debt based currency to pay down existing debt and purge it COMPLETELY from the system.

    “The problem with socialism is that you eventually run out of other people’s money. ”
    ― Margaret Thatcher

  • therooster:

    Time for a bullion price breakout followed by the grass roots monetization of precious metals from the bottom-up. “The stick” of inflation is pushing us there on the basis that monetization cannot be a top-down process as it would be far too abrupt for markets and cause a dollar crash. Rate of change is critical so the elite are now limited to carrying the stick after setting the stage for real-time gold-as-money back in 1971. The FIXED peg had to be severed and the role of the floating fiat dollar as a currency has only been a stop-gap measure on the basis of the dollar finding its ultimate purpose of acting as a real-time measure and servant for real-time gold-as-money. Hail to the stick.

  • Aka77:

    Excellent article as always.I don’t wish to engage in some sort of hair-splitting exercise,but I think you misread the chart on doubtful loans in Spain:it seems to me that they currently stand at 9.42% of total loans whilst it’s unemployment that stands at 25%(as indicated by the right-axis reference in the chart).
    Great time to buy some March/June 2013 put options on the S&P 500 in conjunction with a EurUsd long trade,as a way to bet on the very likely cold shower that awaits many equities investors whilst at the same time betting on the possibility that the “see no evil” exercise lasts longer than a sane man could assume,an event possibly confirmed by today’s technical action.

    • mc:

      Also, the sum of Spanish Bank balance sheets is I believe 4.3 Trillion EUR. If they are looking at losses on NPLs of even 3%, they are 130 Billion EUR in the hole and the 100 B EUR bank bailout to be is already going to be exhausted. Since we know that the pretending of Spanish banks is covering up even more NPLs, that 9.4% will continue to skyrocket and the entire ESM could be consumed by Spanish banks alone. I’d be way more inclined to force Spain out of the Euro if sovereign and banking debt would end up being backed by Germany.

      • jimmyjames:

        I’d be way more inclined to force Spain out of the Euro if sovereign and banking debt would end up being backed by Germany.

        ***********

        I think first they want Spain to sign over their resources their future tax base and the big prize Spain’s gold for collateral for the 100 billion -after that there is no need to kick them out-once the banks via their bought off governments have all the real wealth confiscated they will leave them to languish in banker debt with poor employment prospects for a few generations-

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • LA5H5981sc
President George W. Bush presents the Presidential Medal of Freedom to Federal Reserve Chairman Alan Greenspan, one of 14 recipients of the 2005 Presidential Medal of Freedom, awarded Wednesday, Nov. 9, 2005 in the East Room of the Whiite House.  White House photo by Shealah CraigheadAlan “Bubbles” Greenspan Returns to Gold
      Faking It   Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. […] The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. — Alan Greenspan, 1961   He was in it for the power and the glory... Alan Greenspan gets presidential bling...
  • William SimonEnd of an Era: The Rise and Fall of the Petrodollar System
      The Transition   “The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.” Ron Paul   A new oil pipeline is built in the Saudi desert... this one is apparently destined for the Ghawar oil field, one of the oldest fields in Saudi Arabia...
  • Vote Early Zombie at Sharpstown High SchoolWriting on the Wall
      Time to Sell... Maybe BALTIMORE – Yesterday, the S&P 500 hit a new all-time high. And the Dow just hit a new record close as well. If you haven’t sold yet, dear reader, this may be one of the best times ever to do so.   It's still flying... sorta. Meet Bill Bonner's tattered crash flag Image credit: fmh   We welcome new readers with a simple insight: Markets are contrary, pernicious, and downright untrustworthy. Just when the mob begins to bawl most loudly...
  • robot tradersA Fully Automated Stock Market Blow-Off?
      Anecdotal Skepticism vs. Actual Data About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout in the SPX and the Dow Jones Industrial Average to new highs should be delivering the required technical signals.  The bots keep buying... Illustration via...
  • Toscana_Siena3_tango7174The Central Planning Virus Mutates
      Chopper Pilot Descends on Nippon Readers are probably aware of recent events in Japan, the global laboratory for interventionist experiments. The theories of assorted fiscal and monetary cranks have been implemented in spades for more than a quarter of a century in the country, to appropriately catastrophic effect. Amid stubbornly stagnating economic output, Japan has amassed a debt pile so vast since the bursting of its 1980s asset bubble, it beggars the imagination.   A...
  • tokyo whaleDestination Mars
      Asset Price Levitation One of the more preposterous deeds of modern central banking involves creating digital monetary credits from nothing and then using the faux money to purchase stocks.  If you’re unfamiliar with this erudite form of monetary policy this may sound rather fantastical.  But, in certain economies, this is now standard operating procedure.   The “Tokyo Whale” Haruhiko Kuroda explains his asset purchase madness with a few neat little slides. Photo credit:...
  • The-Deep-State-Mike-LofgrenAmerica Has Become a “Parasitocracy”
      Dread and Denial So, let’s return to the discussion you can’t have with your congressman, your mailman, or your barmaid. It’s the important one. It concerns what the Fed is really up to.   Eight years after achieving independence, a State modeled after the British merchant state was established in the US. It took a while for the Deep State to consolidate itself within it, a process that was accelerated greatly in the run-up to and aftermath of WW I. Illustration by Ana...
  • London-City-Scene lo rezFat People for Trump!
      Alphas and Epsilons BALTIMORE – One of the delights of being an American is that it is so easy to feel superior to your fellow countrymen. All you have to do is stand up straight and smile. Or if you really need an ego boost, just go to a local supermarket. Better yet, go to a supermarket with a Trump poster in the parking lot.   The protest vote attractor with the funny hair. Image credit: Liberty Maniacs   Trigger warning: In the following ramble, we make fun of...
  • bristlecone-1000x672Long Term Market Perspectives
      Methuselah Tree When looking for a good theme for this post I pondered for a while and then decided to use a picture of a bristlecone pine, which are widely considered to be the oldest living trees in the world.   Ye olde bristlecone Photo credit: Kosta Konstantinidis   You can find them near the Nevada/California border and if you wind up traveling in the area then I strongly recommend that head over to Bishop and from there head up high up into the White...
  • Juncker, Keqiang, Tusk 2EU Sends Obsolete Industries Mission to China
      “Tough Negotiations” The European press informs us that a delegation of EU Commission minions, including Mr. JC Juncker (who according to a euphemistically worded description by one of his critics at the Commission “seems often befuddled and tired, not really quite present”)  and European Council president Donald Tusk, has made landfall in Beijing. Their mission was to berate prime minister Li Keqiang over alleged “steel dumping” by China and get him to cease and...
  • Purchasing Power of the BuckThe Real Reason the “Rich Get Richer”
      Time the Taskmaster DUBLIN – “Today’s money,” says economist George Gilder, “tries to cheat time. And you can’t do that.” It may not cheat time, but it cheats far easier marks – consumers, investors, and entrepreneurs.   Tempus fugit – every action humans undertake has to take time into account. In the economy, interest rates serve as the signal and regulator of the inter-temporal structure of capital. In an unhampered free market economy, they tell...
  • chart-4-silver-basis and cobasisGold is not Going to $10,000
      One Cannot Trade Based on the Endgame The prices of the  metals were down again this week, -$15 in gold and more substantially -$0.57 in silver. Stories continued to circulate this week, hitting even the mainstream media. Apparently gold is going to be priced at $10,000. Jump on the bandwagon now, while it’s still cheap and a bargain at a mere $1,322!   All aboard... or maybe not? It all depends on what one wants to achieve – there's many a slip 'twixt the cup and the...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com