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:

  • mad_professor-600x399A Historic Rally in Gold Stocks – and Most Investors Missed It
      Buy Low, Sell High? It is an old truism and everybody has surely heard it more than once. If you want to make money in the stock market, you're supposed to buy low and sell high. Simple, right?   Successful stock market investing in two simple steps Photo via slideshare.net   As Bill Bonner once related, this is how a stock market advisor in Germany explained the process to him:   Thirty years ago, at an investment conference, there was a scalawag analyst...
  • gold barGold and Negative Interest Rates
      The Inflation Illusion We hear more and more talk about the possibility of imposing negative interest rates in the US. In a recent article former Fed chairman Ben Bernanke asks what tools the Fed has left to support the economy and inter alia discusses the use of negative rates. We first have to define what we mean by negative interest rates. For nominal rates it’s simple. When the interest rate charged goes negative we have negative nominal rates. To get the real rate of...
  • NYSEWhy is the Stock Market so Strong?
      Dismal Earnings, Extreme Valuations The current earnings season hasn't been very good so far. Companies continue to “beat expectations” of course, but this is just a silly game. The stock market's valuation is already between the highest and third highest in history depending on how it is measured.   Photo credit: Kjetil Ree   Corporate earnings are clearly weakening, and yet, the market keeps climbing. The rally is a bit of a “all of worry” type of...
  • 800px-JuergenHabermasCultural Marxism and the Birth of Modern Thought-Crime
      What the Establishment Wants, the Establishment Gets If a person has no philosophical thoughts, certain questions will never cross his mind. As a young man, there were many issues and ideas that never concerned me as they do today. There is one question, however, which has intrigued me for the longest time, and it still fascinates me as intensely as it did back then: Does spirit precede matter or is it the other way around? In other words, does human consciousness create what we...
  • the worst-1Why All Central Planning Is Doomed to Fail
      Positivist Delusions [ed. note: this article was originally published on March 5 2013 – Bill Bonner was on his way to his ranch in Argentina, so here is a classic from the archives] We’re still thinking about how so many smart people came to believe things that aren’t true. Krugman, Stiglitz, Friedman, Summers, Bernanke, Yellen – all seem to have a simpleton’s view of how the world works.     A bunch of famous people with a simpleton view of how the...
  • mecca-3Gold Stampede
      Stampeding Animals The mass impulse of a cattle stampede can be triggered by something as innocuous as a blowing tumbleweed.  A sudden startle, or a perceived threat, is all it takes to it set off.  Once the herd collectively begins charging in one direction it will eliminate everything in its path.   Better get out of the way... stampeding bisons Photo credit: Surface Niusance   The only chance a rancher has is to fire off a pistol with the hope that the shot...
  • the-pantsir-s1-a-combined-short-to-medium-range-surface-to-air-missile-and-anti-aircraft-missile-system-the-system-consists-of-12-surface-to-air-guided-missiles-and-two-30-mm-automatiRussian Aggression Unmasked (Sort Of)
      Provocative Fighter Jocks Back in 2014, a Russian jet made headlines when it passed several times close to the USS Donald Cook in the Black Sea. As CBS reported at the time:   “A Pentagon spokesperson told CBS Radio that a Russian SU-24 fighter jet made several low altitude, close passes in the vicinity of the USS Donald Cook in international waters of the western Black Sea on April 12. While the jet did not overfly the deck, Col. Steve Warren called the action "provocative and...
  • 12-Capital vs consumer goods prod LTUS Economy – Ongoing Distortions
      Business under Pressure A recent post by Mish points to the fact that many of the business-related data that have been released in recent months continue to point to growing weakness in many parts of the business sector. We show a few charts illustrating the situation below:   A long term chart of total business sales. The recent decline seems congruent with a recession, but many other indicators are not yet confirming a recession - click to enlarge.   Wholesale...
  • chart-2-gold and treasury yieldGetting it Wrong on Silver
      Erroneous Analysis of Precious Metals Fundamentals We came across an article at Bloomberg today, talking about silver supply troubles. We get it. The price of silver has rallied quite a lot, so the press needs to cover the story. They need to explain why. Must be a shortage developing, right? At first, we thought to just put out a short Soggy Dollars post highlighting the error. Then we thought we would go deeper. Here’s a graph showing the price action in silver since the...
  • trumpedPolitical Pundits, or Getting Paid for Wishful Thinking
      Bill Kristol - the Gartman of Politics? It has become a popular sport at Zerohedge to make fun of financial pundits who appear regularly on TV and tend to be consistently wrong with their market calls. While this Schadenfreude type reportage may strike some as a bit dubious, it should be noted that it is quite harmless compared to continually leading people astray with dodgy advice.   To answer the question posed in the picture with the benefit of hindsight: not really.... (look...
  • HPQRunning Mate Turns Into Fall Girl
      Odd Couple While checking on the US primaries a few days ago, we came across a piece of news informing us that pretend candle-swallower Ted Cruz had picked Carly Fiorina as his “vice-presidential running mate”. Our first thought upon hearing this was “WTF”?   The match made in heaven... two loooosers find each other. Photo credit: AP   It's not so much that he's picking another “loooooser” as The Donald would put it...the real absurdity of it is that...
  • Queen_2100 Years of Mismanagement
      Lost From the Get-Go There must be some dark corner of Hell warming up for modern, mainstream economists. They helped bring on the worst bubble ever… with their theories of efficient markets and modern portfolio management. They failed to see it for what it was. Then, when trouble came, they made it worse. But instead of atoning in a dank cell, these same economists strut onto the stage to congratulate themselves.   The scalawag himself. Keynes provided governments with 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