62 billion rescue for Spanish banks (weekly report)

62 billion rescue for Spanish banks (weekly report)


It became official on Monday: Finance Minister Luis de Guindos presented a petition to the Euro Group for assistance to rescue the shaky Spanish banking system. In principle, the petition has already been granted, there remains only the task of agreeing the details of the conditions, to be finalised on 9th July.

It is anticipated that the interest rate on this immense sum will be set at between 3 and 4%, with repayment over 40 years but with a period of grace of between 5 and 10 years when interest only will be paid.

The “stress test”

The actual amount for the rescue was not specified in the letter but the Government has indicated it will be based on the results of the “stress test” carried out by the independent auditors Roland Berger and Oliver Wyman, who said Spanish banks need a recapitalisation of between 51,000 and 62,000 million euros, mainly to reduce their risks from non-serviced loans to the property sector. The auditors have been criticised for not including the losses suffered in the share values of the banks in the recapitalisation.

The auditors estimate the value of the dwellings on the balance sheets of the banks may fall a further 26% over the next two years (the International Monetary Fund estimates a fall of 23.5%) bringing their value down by 55 to 60% from the peak of the property bubble in 2008. The estimated value of building land is even worse, with a fall in value of 90%.

The “men in black” are already in Spain

A few weeks ago the Economy Minister Cristobal Montoro, said that the “men in black” would not come to Spain. The euphemism is used for the technical representatives of the European Commission, the Euro Group and the International Monetary Fund, who work out the conditions for rescue and later ensure the conditions are being implemented.

Since monday “the men in black” have been in Madrid, working on a program for further cuts in Spaniards’ living standards and a slimming down of the banking sector. From 9th July, after the Euro Group has accepted the program, the funds will be available.

Spain is in administration. Preparing for the next rescue

The Spanish government is trying to ensure that the rescue package goes directly from the European Rescue Fund to the banks, without first going into the budget of the government. The reasons for this may be Spanish pride, that we have mentioned previously ,“Spain has not been rescued, only the banks!” or Government fear that the banks may not be able to pay for the rescue, or that they want to save a rescue possibility for next time; the big bang when the regions are definitely out of funds, the Social Security System being unable to pay pensions or when tax income is insufficient to cover the Administration’s wages.

However, the letter sent by the Spanish Government, includes the following:

“El Fondo para la Reestructuración Ordenada Bancaria (FROB), que actuará en representación del Gobierno de España, será la institución receptora de los fondos que canalizará a las entidades financieras.”

That is: The Government agency FROB, acting as the representative of the Government, will be the institution receiving the funds to be channelled to the financial institutions.

As clear as mud !

Fasten your safety belts !

Moody’s downgrades Spanish debts

Rating Agency Moody’s has slashed Spain’s credit qualification by 3 points, from A3 to Baa3, indicating that the rescue of the banks increases the country’s credit burden. The agency has calculated Spanish debt will increase to 90% of Gross Domestic Product, and thus has placed the country’s debt just one point above ‘rubbish bonds’.

The Agency has also revised downward the rating of all Spanish banks, including Banco Santander and BBVA, as well as FROB, the government agency for restructure of the Banking sector.

Markets up and down

Before the petition for a rescue materialised and the downgrade by Moody was known on Monday, the bewildered markets made a modest rally in Spanish stocks, and the country risk went briefly below the 500 point mark. However, Monday morning the interest on Spanish public bonds shot back up to 6.5%, the country risk returned to fatal terrain above 500 points and the IBEX fell 3.67% to 6,624 points. By Wednesday morning the country risk had increased to 540 points and the Ibex had fallen a further 1.44.

This year so far the Ibex has fallen 23.79% !

Cheating the third world

The Prosecutor in the Valencia Anti-Corruption Court has accused the Ex-Councillor for ‘Solidarity and Citizenship’ in the Valencia Regional Government, Rafael Blasco, of prevarication, bribery, influence peddling, falsification of documents and the diversion of public funds.

The alleged crimes are said to have been committed between 2008 and 2011, and involve Guinea Equatorial, Cameroon, Mauritania, the Dominican Republic, Nicaragua, El Salvador, Thailand, and Haiti.

The court is investigating the supposed deviation of some of the funds obtained by certain NOG.

Miners in total strike

The miners in the deficitary coal mining region of Asturias, are on indefinite strike by against the cuts in the subsidies for the coal industry. Several roads have been blocked by barricades or trees. The trade unions maintain there is 100% participation in support of the action, and bakeries, colleges, offices and supermarkets in the area have posters in their windows showing their solidarity with the striking miners.

Part payment for medicines in Catalonia

From this month the Catalans must pay 1 euro for each medical prescription. The intention is to collect 50 million euros to help reduce the huge deficit in the public health sector.

Building land (suelo urbano) falling fast

With almost no buyers for dwellings and no new building projects, the price of building land is falling fast. In the first quarter of this year, the average price was 177.6 euro per m2. According to the Ministry of Development this is 2.7% less than in the previous quarter and 16.4% lower than a year ago.

At the beginning of 2007 the price per m2 was 284.6 euros, since then it has continued to fall ………..

Fines for not disclosing account

In the new law on Fiscal Fraud, approved last week, a Spanish taxpayer not disclosing information on overseas accounts may be fined a minimum of 10,000 euros, with an additional 5,000 euros for each item left out. The law obliges taxpayers to communicate all “accounts, values, titles, income or real estate” they have, are beneficiaries of, or hold a power of attorney for.

A foreign resident is automatically a taxpayer in Spain, even if he pays his income tax in his home country. Please consult your tax consultant; he/she will have the new law to hand !

Tourism picking up again

After a downturn of 1.7% in April, foreign tourism is again picking up with an increase of 5.8% over the same month last year. Over the past five months the increase was 2.4%.

There are less British tourists (down 2.3%) but more Germans (+ 17.6%) and French (+ 3.8%).

Catalonia has increased its tourism by 13.8%, the Balearics by 3%, whilst Andalusia slipped 3.4%.

President of Judges forced to resign

Carlos Divar, President of the Spanish Judges, has been forced to resign after it became known his many trips to Marbella and various countries, were paid for by the Consejo General del Poder Judicial. It had also been reported that on average, each of the 20 members of the council in 2011 were paid 22,411 euros in traveling expenses, and that was not including the costs of their bodyguards.

Gross Domestic Product falling…..

In 2011 the GDP per habitants in Spain fell below the European Union average. 2007 it was 105% above the average. Today it stands at 99%. There are large differences in the GDP per capita in the European Union, ranging from 274% in Luxembourg to 45% in Bulgaria.

…..and also labour costs

Spain has the longest period of falling labour costs in the OECD. In the first quarter of 2012 the labour costs fell 0.7%, only beaten by the Check Republic (down 3.8%), Korea (3.3) and Finland (2.1% down).

We publish an article (which seems to have lost something in its translation from Spanish to English):

The Deutsche Bank, beneficiary of the Spanish «rescue»

Vincente Navarro

Professor of Public Policy. Pompeu Fabra University, and Professor of Public Policy. The Johns Hopkins University


One of the causes of the current crisis in Spain is the real estate bubble burst. The marriage of financial capital (banks, savings banks, insurance companies and other financial institutions) and created such real estate bubble. In the last ten years more houses were built in our country than the whole of France, Britain and Germany. And despite this huge building which was around 9% of Spanish GDP, prices soared 150%, rising much faster than wages, and that as a result of improper speculation. There is no doubt that banks, savings banks, the Bank of Spain and the public authorities, both Spanish, and European, were aware of it. It was enough to see a chart that compared the evolution of housing prices and wages (the vast majority of homebuyers money derive their income from work) to see that the former grew much faster than seconds. The distance between the two prices is trying to fill with credit. And hence the huge household debt.

All this was predictable. And could have seen it coming and could have been avoided. But neither the Bank of Spain (despite the warning of the technicians of such an institution) or the Spanish government took no action. He was right German Chancellor Angela Merkel, as indicated recently that the Spanish authorities had acted in an irresponsible way in the last ten years to not have prevented the housing bubble based on mere speculation, and its explosion.

But Merkel forgot one key detail, which enabled him not forget to include the government and German banks in this review of what happened in Spain. And forgetting is that German banks played a role in this real estate boom. Much of the money that fueled the real estate boom came from the German banking. Actually, the real estate bubble burst occurred when the bank stopped lending to German banks and Spanish savings banks, a result of German banks in fear of contamination with toxic financial products from U.S. banks stopped all flow of credit. And that’s when the financial credit was discontinued and the Spanish housing bubble burst, creating the huge slowdown in economic activity and the precipitous drop in revenue to the State (both central and regional levels) that created the deficit of the government. This deficit did not create the growth of public spending, but the decline in revenue to the state. In fact, when the crisis began, in 2007, the Spanish state had a surplus. The government deficit in Spain is not the cause of the crisis, as Rajoy is saying, but is reversed, the government deficit is the result of low economic growth and low incomes to the state.

All austerity measures, including cuts (representing frontal attack poorly funded welfare state in Spain), are intended to pay the debt to banks in Germany and other countries (France, Britain and Belgium), which had achieved huge profits during the housing bubble, huge profits to continue. In fact, the banking crisis of the peripheral countries (Spain, Greece, Portugal and Ireland) is doing very well to the German banking, as there is a flow of capital (ie money) in these countries, fleeing the crisis toward the center, and most notably, Germany. And the figures speak for themselves. According to Josef Ackermann, chairman of Deutsche Bank, the benefits of such bank reached a staggering amount of 8,000 million euros in 2011 (with 8 million in bonuses to certain Mr). In fact, while unemployment was more than alarming figures in Spain (and other peripheral), 50% of youth are unemployed, and health and education suffer brutal cuts (and no other way to say it), the benefits Deutsche Bank rose 67% in three years (2009-2011), as noted in the journal Conn Hallinan Counterpunch (6/15/12) ( «Greed and the Pain in Spain» ).

All data clearly show that German banks benefited greatly from the Spanish housing bubble (and Irish), as well as the financial crisis of the peripheral countries. The enormous sacrifices of the masses imposed on Spain and other countries peripherals that can be paid to the German banking (among others). And the famous bailout of 100,000 million euros aims to save Spanish banks, no credit to ensure that neither is nor was he expected, but that can pay its debts, also in the German banking. And the German banking instrument used to impose its policies is the European Central Bank, which as I have indicated on several occasions (see section on my blog Economic Policy www.vnavarro.org ) is not a central bank, but a lobby German banks and German central bank, the Bundesbank.

The bailout is the latest of many other interventions that the economists of the European Commission, the European financial system service, led by German banks are imposing to Spain. As you said German Finance Minister Wolfgang Schaube (against Rajoy), the bailout will involve direct supervision by the European Central Bank, the European Commission and the International Monetary Fund, financial reforms, as well as the Spanish macroeconomic and fiscal policies, thus turning Spain into a German colony. And all this with the help of the «super patriot» Spanish Conservative government.

Why such a government is working with these policies that pose a clear loss of sovereignty? And the answer is clear. Because it uses this external mandate (arguing that there are no alternatives) to get what you always wanted right in Spain, that is, weaken the world of work and privatize the welfare state. This government agrees with the aim of the rescue that is clearly defined by the statements of the German Central Bank President, Jens Weidmann, who in those statements in El Pais could not be more clear when he stated that the reforms should emphasize more labor reforms ( which means lower wages) and the privatization of services (which means the dismantling of the welfare state). So clear.

Reuter on Spain’s bond emission

(Reuters) – Spain’s borrowing costs hit a new euro era high at a debt auction on Thursday, a few hours before it is expected to shed light on the dire state of its weaker banks and possibly make a formal request for European Union funds to rescue them.

The auction proved the Spanish Treasury can still borrow on international markets, albeit at a high cost, and it made the best of solid demand by selling 2.2 billion euros ($2.8 billion) in bonds, above the targeted amount.

«We want to emphasize the strong demand despite the current situation on the markets,» an Economy Ministry source told Reuters.

However, the rocketing yields contrasted with France’s sale on Thursday of bonds maturing in 2014 for just 0.54 percent, as concerns that Spain might have to take a full sovereign bailout meant that international investors are opting for less risky debt. Madrid had to pay 4.706 percent for the same maturity.

While the government does not give immediate breakdown of buyers in primary auctions, data shows international investors are steering clear of Spain and have left the often troubled domestic banks to buy up the government’s bonds.

«They got it away, it’s about the most positive thing you can say about it. Also it’s above the modest target they have set for themselves, but the yields are not anything to be too pleased about it. These are high levels,» said Elisabeth Afseth, fixed income analyst at Investec.

Spain, which is in its second recession since 2009 and has the highest unemployment rate in the European Union, is the latest euro zone country in the firing line after Greece, Ireland and Portugal, which have already taken bailouts.

Madrid may make a formal request for up to 100 billion euros in aid for its banks at a Luxembourg meeting of euro zone finance ministers, who already approved the plan informally earlier this month.

The demand would follow the release of the results of an independent audit of the Spanish banks, which have been hammered by the effects of a property crash and the recession.

Banking sources believe this will say the lenders need to raise a further 60-70 billion euros to improve their capital position.

A lack of information on the bank rescue has helped to drive yields on Spanish government debt in recent weeks to levels deemed unsustainable in the medium term.

However, Spanish government bond yields fell further after the auction. The 10-year yields were last 15 ticks lower on the day at 6.61 percent, with shorter-dated yields falling even more.

The Treasury sold the bond due in July 2015 at a yield of 5.457 percent compared with 4.876 percent in May, while the longer dated July 2017 bond sold for 6.072 percent, up from 4.960 percent last month.

This was the highest auction yield for a five-year bond since 1997, two years before Spain adopted the euro.

Spain has sold about 61 percent of its planned issuance in medium and long-term debt following Thursday’s auction, as it got ahead of schedule at the start of the year when banks used cheap cash from the European Central Bank to buy bonds.

The effect of the massive ECB loans of three-year cash is fading fast, and yields have leapt sharply since the last liquidity offer in February.

And Huffington Post commented like this when the report of the auditors was published:

MADRID — Spain’s troubled banks could need as much as (EURO)62 billion ($78.6 billion) in new capital to protect themselves from economic shocks, according to independent auditors hired by the government to assess the country’s struggling financial sector, officials said Thursday.

The Spanish government will use the auditors’ report as the basis for their application for a bank bailout loan from the 17 countries that use the euro. With tensions rising over the future of the eurozone, Spain is expected to submit its specific request for outside assistance no later than Monday, said Jean-Claude Juncker, who chairs meetings of zone’s finance ministers.

«We invited Spain to pursue this clear and ambitious strategy, which needs to be implemented swiftly and communicated early,» Juncker said after Spanish Economy Minister Luis de Guindos presented the audit results to the ministers who are members of the so-called Eurogroup.

Deputy Bank of Spain Governor Fernando Restoy noted that this worst-case scenario cited by the auditors was far below the (EURO)100 billion ($126.7 billion) loan offered by the eurozone’s finance ministers two weeks ago.

Spain’s banking sector is struggling under toxic loans and assets from the collapse of the country’s property market in 2008. Concerns that Spain’s economy is so weak that it could not afford the cost of propping up its banks has sent its borrowing costs soaring to levels not seen since it joined the European single currency in 1999.

The worry is that Spain could soon find itself unable to finance its debts by itself and join Greece, Ireland and Portugal in seeking a rescue loan for not just the banks but the whole country.

The stakes are huge: Spain is the eurozone’s fourth-largest economy and would seriously hit the bloc’s finances should it need bailing out. The country is struggling through a recession with a 24.4 percent jobless rate. On top of this, government’s main customers at its debt auctions are Spanish banks – the sector now being bailed out. In a sign of how reluctant the markets are to invest in Spain, the country had to pay sharply higher interest rates to raise (EURO)2.2 billion ($2.8 billion) in a bond auction Thursday.

The audits of Spain’s lenders, carried out by consultancies Roland Berger and Oliver Wyman, covered 14 banking groups that account for 90 percent of the country’s financial sector. The country will use the reports’ findings to decide how big a bailout loan to ask for.

Restoy and Deputy Economy Minister Fernando Jimenez Latorre declined to outline individual banks’ needs.

Top of Form

Bottom of Form

In the auditors’ stress test for the worst-case economic scenario – a fall in gross domestic product of 6.5 percent over the period 2012-2014 – most of the banks were deemed to be in a «comfortable» position, Restoy said.

«We’re not talking about the imperative capital necessities of the banks. We’re not talking about someone urgently needing such and such an amount of capital to deal with their obligations,» said Restoy. «We’re talking about the capital that would be needed if we were to see a situation of extreme tension which is very unlikely to come about.»

«We should keep in mind we are not talking about how much capital an entity needs to survive. We’re talking about how much capital an entity will need to confront a situation of extreme stress,» he added.

Eurozone finance ministers offered Spain a bailout loan of up to (EURO)100 billion on June 9. The terms of the loan – for which Spain, rather than banks, will ultimately be responsible for – still have to be negotiated.

Spanish Prime Minister Mariano Rajoy hailed the audit results during a visit to Brazil as an important move toward restoring international confidence in Spain, currently seen as one of the eurozone’s weakest links.

«It’s a decisive step in the right direction because it makes an accurate and credible diagnosis that fences in the capital needs in manageable margins and ensures that the financial assistance made available to Spain by our European partners is more than enough to solidly clean up our financial institutions,» Rajoy said in Sao Paulo after meeting with business leaders.

Oliver Wyman Inc. gave a worst-case range of (EURO)51 billion to (EURO)62 billion in new capital needs while Roland Berger Strategy Consultants GmbH gave a single figure of (EURO)51 billion.

The release of the audits probably won’t erase market nervousness about Spain, said Mark Miller, an analyst with Capital Economics in London.

«At face value it looks as if there is a reasonable safety margin given that up to (EURO)100 billion is potentially available,» he said. «Having said that, the extent of the economic situation in Spain could even deteriorate beyond what is being described as an adverse scenario.»

Some investors will likely still be nervous over whether the auditors’ reports discovered most if not all of the toxic assets on the balance sheets of Spain’s banks, Miller said. And their fears are compounded by concerns that Greece might still end up having to leave the single currency, further destabilizing the eurozone and especially Spain.

The results of the audits are good news for Spain because both companies came up with similar numbers and the overall figures were lower than some estimates of the banking sector’s recapitalization needs, said Gayle Allard, an economist with Madrid’s IE Business School.

«I think it’s a fantastic result because there was talk of needs of (EURO)70 billion to (EURO)80 billion and that the loan could have been for (EURO)100 billion,» she said.

Investors could still easily find something to scare them about the results, Allard said, «but I don’t think there’s any reason to do so.»

She added: «The audits have come in better than anyone has expected, there’s still some uncertainty, but if both of them are coming to the conclusion of those numbers we’ve got to be in the ballpark.»

The Economic Times wrote

NEW YORK: Grim. Serious. Terrifying. Nerve-rattling.

These are the words some prominent American investors and strategists are using to describe the worsening debt crisis in the euro zone and its impact on the global economy.

While growth has been slowing in China and the United States and companies warn about the effect on earnings, there is a mounting sense among the financial community that politicians and markets are operating on two completely different timelines.

They see a fractured Europe fiddling in the near term, attempting to seal one fissure as another larger one appears while they talk about a five-to-10-year timeframe for real solutions, such as a more fiscally integrated euro zone. They see investors who want solutions in the next few weeks and months or else nations like Spain and Italy could find they cannot borrow at all on capital markets, starting an economic firestorm that would make today’s problems seem mild.

Some even suggest markets are taking on shades of the 2008 global crisis, with the potential for a collapse in investor confidence, bank runs in Europe and a seizure for the global financial system.

«History may not repeat but it often rhymes. The fear is that it could be a replay of 2008. The reality is that the potential for a replay of 2008 on steroids is not exactly zero,» said Bonnie Baha, portfolio manager at DoubleLine Capital, which oversees $35 billion. Baha, who is based in Los Angeles, was speaking while visiting Europe last week.

Added financier Steve Rattner, who is the former head of the U.S. auto task force, «We should be terrified about the euro crisis because the Europeans are trying to fix a deeply flawed system with the equivalent of Band-Aids,»

And Dan Fuss, vice chairman and portfolio manager at Loomis Sayles, which oversees $172 billion in assets, sees little reason not to be very worried. «We have uncertainties of the wrong kind. Bringing the political cohesion together has proven to be more difficult than I had thought. The headlines coming out of Europe are scary.»

To be sure, while these are the views of highly credible investors, they are not necessarily the mainstream. Most economists and strategists still think Europe will be able to muddle through its problems as it has for the past few years. And while the majority of them see weak growth in the United States, they don’t expect the economy to slip into a recession.

But most economic pundits were wrong in 2008 when they didn’t foresee the financial crisis, and this time around even the optimists have had to pull back their U.S. and global growth expectations in recent months.

What’s more, some investors and economists say central banks, including the Federal Reserve, are running low on ammunition after having loosened monetary policy considerably.

The economic crises in global history that have stemmed from excessive debt and financial leverage have proved to be the deepest. And while the United States has managed to maintain slow, if steady economic growth, many European countries are dealing with the threat of deep recessions: very high unemployment and intractable deficits that are only worsening because of the lack of growth.

The modest stimulus measures that have been talked about – top euro zone leaders agreed at a meeting this week to spend 130 billion euros ($156 billion) to seek to revive growth and the European Central Bank may cut interest rates at its meeting on July 5 – may be too little, too late given the tsunami of debt some nations in the euro zone face.

«The realization that Spain will most probably need a bailout by the EU has rattled investors’ nerves,» Baha of DoubleLine said.

Spain, the fourth-largest economy in the euro zone, will need between $350 billion and $400 billion to stabilize conditions in the wake of a real-estate crash, according to Mark Grant, managing director at Southwest Securities Inc., who has been one of the biggest bears on the euro zone throughout the crisis.

«I do not think most people realize how serious the situation is with Spain,» Grant said.

Grant, who forecast Greece was going to go bankrupt in January 2010, said on Sunday, «I fear the shades of 2008 are almost upon us once again and the increasing darkness is discernible.»

The atmosphere was hardly helped on Sunday when German Finance Minister Wolfgang Schaeuble told Bild am Sonntag in unusually blunt language that Greece’s new coalition government should stop asking for more help and instead move quickly to enact more reform measures that had been agreed in return for previous bailouts from European partners. The new Greek government has indicated in a proposal seen by Reuters that it wants tax cuts, extra help for the poor and unemployed, a freeze on public sector layoffs and more time to cut its deficit.

Bingo Capitalism

Ignacio Escolar : Can the Autopistas go Broke? (Original at


There’s no money to rescue families, the unemployed, those who can’t pay their mortgage, the sick, the elderly … There is no money for anyone, but there are exceptions: and not just the banks, which cannot be left to close, no matter what. This bingo capitalism we have, where profits are private but losses are public, cannot allow the ruin of our toll road concessions. The Government is preparing a new rescue plan for these private investment companies. It will be the third in just a few years. In 2009 and 2010 – with unusual parliamentary consensus – Congress passed two separate millionaire aid packages for the autopistas. It was not enough and El País published today that the government is studying how to cover the shortfall with taxpayer money: we are talking some 3,800 million euros.

Can a highway go bust? The government fears that, in case of bankruptcy, the administration ends up in court and would have to take responsibility for any debt. There are legal arguments for this: the concessions were made on estimates of traffic that never came true, the ley del suelo of President Aznar raised the costs of land expropriation and the accounts therefore never balanced out. Maybe there is no other way out, but it is not a great comfort to have to choose between a rock and a hard place. Should the toll roads that generate better than expected revenues return the difference to the State?

These obscene bailouts serve to corrupt one of the most basic rules of capitalism: that he who invests is entitled to win because of the concomitant risk of losing one’s money. In short, if you owe one hundred thousand euros and cannot pay, you have a serious problem. If you owe a billion, the problem belongs to others.

Translated by Lenox Napier

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