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.”
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 that “Nobody 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.”
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
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
5 Responses to “The Spain – ECB Vaudeville Show”
Most read in the last 20 days:
- A Striking Chart
The Economy and the Stock Market As long time readers know, we are always paying close attention to the manufacturing sector, which is far more important to the US economy than is generally believed. In terms of gross output it is the largest sector of the economy, and it should of course be obvious that saving, investment and production are the only ways to create wealth. What's left of the Brooklyn Domino Sugar Refinery. Photo credit: Paul Raphaelson Contrary...
- Trump and Putin Narrowly Escape Assassination Attempt
The Gloves are Coming Off First a little bit of recent history. Readers are probably aware that some questions about the occasionally malfunctioning Deep State android... no, wait, we'll start again. Questions have recently been raised about the health of presidential candidate Hillary Clinton by various “alt-right” tinfoil hat-wearing conspiracy theorists, such as this one. The monsters are normally hiding under Hillary's bed, but lately they have come out into the open...
- Why the Fed Destroyed the Market Economy
What Have You Done for Me Lately? Swing voters are a fickle bunch. One election they vote Democrat. The next they vote Republican. For they have no particular ideology or political philosophy to base their judgment upon. The primacy of the wallet. They don’t give a rip about questions of small government or big government. Nor do they have any druthers about the welfare or warfare state. In effect, they really don’t care. What’s important to the...
- Donald’s Electoral Struggle
Wicked and Terrible After touting her pro-labor union record, the Wicked Witch of Chappaqua rhetorically asked, “why am I not 50 points ahead?” Her chief rival bluntly responded: “because you’re terrible.”* No truer words have been uttered by any of the candidates about one of their opponents since the start of this extraordinary presidential campaign! Electoral map (note that the coloration may no longer be applicable...) That Hillary Clinton is...
- Janet Yellen’s Shame
Playing Politics In honest capitalism, you do what you can to get other people to voluntarily give you money. This usually involves providing goods or services they think are worth the price. You may get a little wild and crazy from time to time, but you are always called to order by your customers. In the market economy, consumers reign supreme. There is no such thing as a “lost” vote in the marketplace; every penny spent affects production. Mises noted: “Consumers...
- Get Ready for a New Crisis – in Corporate Debt
Imposter Dollar OUZILLY, France – We’re going back to basics here at the Diary. We’re getting everyone on the same page... learning together... connecting the dots... trying to figure out what is going on. The new three dollar bill issued by the Apprehensive States of America. We made a breakthrough when we identified the source of so many of today’s bizarre and grotesque trends. It’s the money – the new post-1971 dollar. This new dollar is green. You...
- The Economy, the Stock Market and the Fed
John Hussman on Recent Developments We always look forward to John Hussman's weekly missive on the markets. Some people say that he is a “permabear”, but we don't think that is a fair characterization. He is rightly wary of the stock market's historically extremely high valuation and the loose monetary policy driving the surge in asset prices. The S&P 500 Index and the NYSE advance-decline line. Most market internals weakened steadily until early February 2016, but...
- Hanjin Marooning in San Pedro Bay
Global Trade Reversal Expansions and contractions in global trade have played out over long secular trends for thousands of years. The Silk Road, for example, was established by the Han Dynasty of China in 130 BC, and allowed for continuous trade between East and West for nearly 1,600 years. In addition to economic trade, the Silk Road was also a conduit for culture and knowledge among its network of civilizations. A map of the main ancient Silk Road - click to...
- Great Causes, a Sea of Debt and the 2017 Recession
Great Cause NORMANDY, FRANCE – We continue our work with the bomb squad. Myth disposal is dangerous work: People love their myths more than they love life itself. They may kill for money. But they die for their religions, their governments, their clans... and their ideas. Famous French hippie and author Voltaire. He wears the same sardonic grin in every painting, whether he's depicted at a young or an old age, doesn't matter. His real name was François-Marie Arouet; he...
- The Donald Versus Killary: War or Peace?
War: A Warning from the Past Although history does not exactly repeat itself, it does provide parallels and sometimes quite ominous ones. Such is the case with the current U.S. Presidential election and the one which occurred one hundred years earlier. The Donald probably has the better slogan... The dominating question which hung over the 1916 campaign was whether the country would remain neutral in regard to the horrific slaughter which was taking place on the...
- A Rift in the Space-Time Continuum
Weird and Unnatural NORMANDY, France – First, a quick look at the markets. The Dow bounced on Monday, recovering 239 points of the nearly 400 it lost on Friday. Why the comeback? FOMC member Lael Brainard: her comments on Monday were touted as the “reason” for the stock market recovering half of Friday's losses. We suspect the real reason is the triple witching on Friday... Photo via twitter.com The financial press has a ready answer: “Stocks gain...
- Crimea: Digging For The Truth
Renewed Escalation This summer witnessed a renewed escalation between Russia and Ukraine after Russian President Vladimir Putin accused Ukraine of sending saboteurs to attack Russian troops, targeting “critical infrastructure”. Kiev denied the allegations and claimed Russia’s “fantasy” was nothing but a false pretense to launch a “new invasion”. August 10: Russian president Putin announces that there was an altercation involving a group of Ukrainian saboteurs at...