A full Spanish bailout – will they, wont they?

The European Central Bank
The European Central Bank

As speculation continues to surround the possibility of Spain requesting a full bailout from Europe, the struggling country has given no indication that any decision has been taken.

In an interview on Sunday Spain’s finance minister, Luis de Guindos, said Spain was “in no rush” to request further assistance from Europe and is safe to hold out until more details emerge about a possible European assistance program.

“When we know the details [of the aid program], we’ll have a more precise calendar,” said Sr. de Guindos.

Spanish Prime Minister Mariano Rajoy last week ‘opened the door’ to officially requesting a bailout from the euro-zone fund to help Spain out of the worst financial crisis it has seen.

Last week ECB President Mario Draghi increased the pressure on Spain when he said the ECB was ready to buy government-bonds if a government requests it as a means of support, under strict conditions. This was a mile away from his comments the previous week when he said the ECB was ready to do “whatever it takes” to save the Euro.

This is a u-turn for Mariano Rajoy’s government who have said, until recently, that they will not need a full sovereign bailout, and that the bank funding would be the only help requested, in the hope that the ECB would buy Spanish debt.

However, over recent days the government have had to concede that without intervention from the ECB the government could be left with no choice but to ask for aid.

Spanish bailout strengthened by Finland deal

Spain and FinlandGuest post by Jenny.

A decade ago, it would have been surprising to know that in 2012 Spain would be one of the countries desperately in need of a bailout from the Eurozone. With a ratio of debt to GDP only slightly more than half that of Germany’s, and Madrid earning more in tax revenue than its total spending, Spain was in a strong economic position.

The country’s current economic situation is, in some ways, a victim of its own success. Twin problems of a burst property bubble that caused the construction industry to collapse, leaving hundreds of thousands of people out of work, and a lack of trust in banks leading to a rumored billion euros being withdrawn from Spanish banks, the country’s economy has been left in trouble.

However, Spain’s future is looking a little more secure now, as a deal has been agreed with Finland to secure the country’s portion of the bailout loan to be given to Spain’s desperate banks.

For the past few days, there had been many rumors regarding the outcome of the talks between the Finnish government and a fund owned by Spanish banks, as well as Finland’s general inclination towards the bailout and the euro. There was even suggestion that the Finns were planning on pulling out of the euro. Speculation was ended on Tuesday 17th July when Finland and Spain agreed a deal.

Finland, one of only four countries in the Eurozone with a triple-A credit rating, has received an agreement for collateral on 40% of its share in the loan, equivalent to 770 million Euros ($942million). Now that the collateral, the main condition Finland had been seeking, has been agreed to, the Finnish parliament is expected to discuss the bailout program for Spain on Thursday, with a vote on the issue taking place on Friday.

Jutta Urpilainen, Finland’s Finance Minister, said, “Despite a tight, tough schedule, we have been able to get for Finland and Finnish taxpayers a collateral arrangement that safeguards our position, and limits Finland’s risks.”

It is expected that the Finnish parliament, having secured its main condition, will vote in favor of the new measures. The country has been seeking collateral in order to protect its taxpayer’s money. There is a feeling in Finland that the recipients of EU bailouts are getting an easy ride while Finns have the face austerity measures at home.

In exchange for collateral, Finland has had to agree to some conditions of its own. The main term being that the country will pay its portion of the loan money to Europe’s permanent stability fund (ESM) in a single upfront payment, rather than five. Urpilainensuggested that other countries had been put off by the large upfront payment. Finland is the only country to seek collateral on its loan. By accepting the collateral, Finland has also agreed to forgo its share of interest margin profits that may have been generated by the recapitalization program.

The deal is based upon a similar deal agreed between Finland and Greece last year in order to secure the former’s participation in the second Greek bailout. As with the previous deal, Spain will be expected to put up cash guarantees for 40% of Finland’s contribution. This money will be invested in low-risk state bonds of the top five countries in the Eurozone. Over a period of many years, these bonds will slowly earn back the entire amount of the loan.

That Finland has opted for similar conditions for its involvement with the Spanish bailout is sure to raise a few eyebrows. Finland’s demands for collateral from Greece a year ago created some anger amongst Eurozone countries. As well as provoking several other countries, including Austria and Slovenia, to express interest in securing similar deals, it also jeopardized the entire Greek bailout. All 17 euro member countries were required to approve the bailout deal and Finland’s deal with Greece, and with the Netherlands disapproving of the deal, the future of the bailout looked uncertain.

Finland was prompted to ask for collateral after a demand by the Social Democratic Party, Finland’s second largest party. The bailout package is estimated to be worth 100 billion euros ($118 billion). Finland’s share of the package is around 1.9 billion euros ($23.3 billion).

Jenny is a finance blogger who writes on behalf of the UK’s third largest landlord information and advice portal. She is currently based in Manchester, England but spent most of last year in the beautiful Gulf Shores, Alabama area.

The Spanish financial crisis and long term loans

Guest post by Amy Harris

Mayhem in the Med

Spain and EuropeThe Spanish financial crisis can be traced back to 2007, but there is no doubt it has worsened in recent months. The usual financially sound country was forced to ask for a bailout from its European neighbours.

Of course, Spain is not the only country to be affected, Greece also needed a bailout after coming close to bankruptcy in 2011. Long term loans had a big role in what resulted in a major financial dilemma for Spain.

The Spanish Housing Market

80 per cent of the Spanish population own their own homes. The governments of the 60s and 70s encouraged Spaniards to buy their own houses even offering them tax relief on their mortgages.

Demand for houses from 2003 onwards was high and over half a million new houses were built in 2005. Banks began to offer 40 year mortgages and recently even 50 year mortgages were available. Spaniards and foreigners alike flocked to buy properties in Spain.

Property Bubble Burst

With the economic downturn of 2008, the property bubble burst and Spain was one of the worst hit countries. The long term mortgages that seemed a good idea just a few years previously suddenly started looking like a risky move. If people defaulted on their mortgage, banks were unlikely to reclaim all their money.

Construction came to a halt and businesses were going into liquidation all across the country. Indeed, Spain had the worst figures for the drop in property sales in the whole of Europe between 2007 and 2008. Sales for this period dropped by over 25 per cent compared to the previous year.

European Impact

Although long term loans were not offered across Europe, the continent soon felt the force of the Spanish financial crisis. Indeed, in 2010, the UK section of the Spanish bank Santander announced loses of 8.5 per cent. This loss was attributed to the bad loans of the bank’s home country. Europe had to sit up and take notice or there was the real possibility that the whole Eurozone could be pulled deeper into the financial wilderness.

The Solution – Europe’s Bailout

As was the case with Greece, the governments of the Eurozone had to bail Spain out with significant loans. In June 2012, it was agreed that Spain would be given a rescue loan of 100 billion Euros, which would be funded by the Eurozone. It was hoped that this substantial amount of money would enable Spain to recover from the crisis and stabilise. A stronger Spanish economy would then sure up a weak Eurozone.

The Spanish financial crisis is by no means over and, the future still remains uncertain. The bailout provided by the Eurozone was only agreed in June so it is impossible to assess its impact so quickly.

What is evident is that Spanish lenders must learn from the past and show much more caution in offering long term mortgages – just as British lenders have learned their lesson from handing out 95 to 100 per cent mortgages.

Whilst the Spanish economy’s future is uncertain, it is hoped that a general Eurozone recovery, together with the large bailout, will allow Spain to once again become the strong stable economy it used to be known for.

Amy Harris is a writer for FinancialTraining.co.uk – which helps British and international students find the right financial courses in London and the UK. Amy is an American expat herself, and enjoys helping people with their careers and financial advice.

Europe imposes 32 new rules on Spain as a condition of bank bailout fund

Spain will be forced to comply with 32 conditions laid down by the EU if it wants to get its hands on the 100,000-million-euro bank bailout.

IVA will have to go up and tax relief on first homes will be scrapped as part of the list.

The ministry of the economy will have to hand over much of its jurisdiction to the Bank of Spain, particularly in terms of the power to sanction financial institutions and granting licences for them to trade.

Internal audits within the Bank of Spain will be carried out, and the Central European Bank (BCE) will supervise its activities.

The Ordered Bank Restructuring Fund (FROB) will have greater powers, and the government must force banks which are sinking to wind up.

Those which require public funding to stay afloat must hand over their affairs to a liquidation company, cut down branch numbers and slash jobs, sell off investments and shares in industry and limit bank managers’ salaries.

Banks which have received State help will be obliged to float on the stockmarket, and savings banks – effectively, building societies – will no longer be able to manage their own commercial banking activities.

Holders of preferential shares and other ‘hybrid’ investments will be expected to bear a percentage of the loss when a bank needs public funds to be able to continue.

Overall, Spain’s banking sector will be closely supervised by the European Commission (EC), the BCE and the European Banking Authority – the latter taking the place of the IMF – and will regularly audit those institutions which have received bailout funds to ensure they comply with the rules.

This will involve their having to supply weekly data on their liquidity and cash held in deposit in client accounts.

Taxpayers will be directly affected by a rise in IVA – the exact percentage of which has not been confirmed – the elimination of tax breaks on first residences, labour reforms, a rise in State retirement age, and a ‘taxation system which aims at fiscal consolidation’, as yet undefined.

Spain’s State deficit will have to come down from its present 8.9 per cent of its GNP to 6.3 per cent by the end of 2012, then to 4.5 per cent after 2013 and 2.8 per cent by 2014.

The banks for which the bailout fund is destined will include, among others, Bankia, CatalunyaCaixa, NovaCaixaGalicia and Banco de Valencia, being the four most pressing cases.

Article source: ThinkSpain.com

And finally…

Graph represents: business confidence, employment figures, bank profits, property sales... take your pick!
Graph represents: business confidence, employment figures, bank profits, property sales, Spain’s future… take your pick!

Once again there isn’t much in the news about Spain other than the bailout so here is a quick overview of what has happened this week.

Hundreds of miners marched in Madrid to protest over a government decision to cut subsidies to the mining sector by nearly two-thirds next year.

Several of Spain’s autonomous regions are at risk of over-shooting their budget-deficit target of 1.5 percent of GDP this year. Budget minister, Cristobal Montoro said yesterday that they have been given one week to take corrective measures.

EU leaders agreed to lend 100 billion Euros to Spanish banks and also to direct it to them, rather than add to the governments debt. Some of the nations involved are looking at taking shares in the Spanish banks as extra collateral.

Rajoy announced that one of the conditions attached to the loan was that he must raise sales tax (IVA). The troubled PM announced to his MP’s that an increase of 3% would be applied bringing the standard rate up to 21%. The reduced rate of 8% for public transport fares, processed foods and bar/hotel services will increase 2 points to 10%. So again, the public are paying for the governments mistakes.

Another condition of the loan is to implement a further 65 billion euros of austerity measures and subsidy cuts.

“We are living in a crucial moment that will determine the future of our families, our youth, our social welfare and all our hopes,” Mr Rajoy said.

“That is the reality. We have to get out of this mess and we have to do it as soon as possible.”

I don’t know why he thinks pumping money into the banks will help anyone, other than the banks. Leaders across Europe are making the same mistake and they will all pay for it at their next elections.

The way the public see it is that if a person robs a bank they go to prison but if a bank robs the people they get bonuses! It has to stop. The banks took our money and lost it, we bailed them out with billions of taxpayers euros yet still they fail and still they refuse to lend and still a quarter of the country is unemployed.

Wake up Rajoy! Concentrate on the people. It is them who will vote you out, not the bankers.

Spanish bailout terms agreed

Spanish Finance Minister Luis de Guindos with ECB President Mario Draghi
Spanish Finance Minister Luis de Guindos talks with ECB President Mario Draghi in Brussels

Finance ministers of the eurozone have today agreed on the terms of the loan that will help Spain to recapitalize it’s banking sector and have decided to mobilise 30 billion euros by the end of the month as “contingency”, said President of the Eurogroup, Jean -Claude Juncker.

“We have reached a political agreement on the memorandum of understanding on the conditions for the Spanish financial sector,” said Jean-Claude Juncker, who revealed that the maturity of the loan will be up to 15 years (mean 12.5 years).

The Eurogroup are expected to give final authorisation to the loan when they return to Brussels on July 20th to finalise the agreement, having first obtained the approval of their governments or parliaments.

As part of the agreement with Spain, finance ministers from all 27 European Union countries are expected to approve a one-year extension, until 2014, to Spain’s deadline for achieving a budget deficit of 3%.

Mr Juncker said there will be specific conditions for specific banks, and the supervision of the financial sector overall will be strengthened.

“We are convinced that this conditionality will succeed in addressing the remaining weakness in the Spanish banking sector,” he said.

Dutch finance minister Jan Kees de Jager said the agreement should be finalised soon as they now have “a tentative deal on the bailout conditions for a bailout of Spanish banks”.

“The total will likely be 100 billion euros. Some countries like the Netherlands, Germany and Finland need to get parliamentary approval. We hope this can be wrapped up within a week.”

The exact amount of the bailout requirement is still not known and is unlikely to be until September, when individual independent examinations and audits of different Spanish banks have been completed.

Bailout good for banks, not for borrowers

IMS - International Mortgage SolutionsIt was announced this week that the final details of the package for Spanish banks will be delayed from the 9th of July to the 20th July.

Any misinterpretation by the public that this rescue package would ensure credit started to flow again in Spain was quickly quashed  by bank leaders like the Chief Executive of Sabadell group who stated the banks who require aid, which is most of them, will find it more difficult to lend rather than the other way round.

BBVA Chief Executive also went to press this week stating that BBVA had no intention of reducing the price of the vast assets they hold to sell them through but would in fact hold on to them until prices increased. For BBVA it could be argued this is an option given their size and overall balance sheet strength but for other lenders it will not be. BBVA will find prices drop further because of what other banks have to do so how long they can hold out without being realistic remains to be seen. Brave words that I doubt he will finally be able to stick by.

On the ground mortgages still remain available for purchasers with average rates now 3% to 3.5% above 12 month Euribor with the Euribor dropping slightly again this month from 1.26% to 1.21% for completions in July.

Average rates for those buying bank owned stock are between 1.5% to 2% but often at the cost of negotiated purchase price.

International Mortgage Solutions
www.international-mortgages.org

Euroland sovereign debt

The ongoing shambles of Euroland
The ongoing shambles of Euroland

The ongoing shambles of Euroland sovereign debt and politics has festered for another month with no fresh sign of resolution. In Britain David Cameron and his cabinet colleagues have taken it in turn to make embarrassing revelations to the Levy inquiry, unsupported by their LibDem coalition colleagues. Little kudos has accrued to either side, as reflected by the lack of change in sterling’s value against the euro. The last month has seen the pound wander back and forth across a two-and-a-half-cent range that has led nowhere. The euro is very slightly weaker than it was before the first abortive Greek election six weeks ago but the difference is minimal.

At the beginning of June the Bank of England’s Monetary Policy Committee decided to keep the Bank Rate steady at 0.5% and to refrain from any new quantitative easing – “printing money” as the tabloids would put it. The minutes of the meeting, published a fortnight later, showed how close a call it was. Four of the nine members – including the governor himself – wanted to increase the asset purchase programme beyond the 325 billion of government bonds already in the scheme.

Investors were surprised by the narrow majority and concluded that it might be no more than a couple of weeks before the Bank rolls out the next phase of its monetary stimulus. That anticipation was reinforced by data the previous day showing that UK inflation had fallen back into its 1%-3% target range in May. It was the first time in two and a half years that consumer prices index inflation had been below 3%. It is possible that the Bank of England governor had such numbers in mind the previous week when he announced, together with the chancellor, a new scheme to feed low-cost money to the country’s banks, conditional on them making cheap loans to individuals and small businesses.

The central banks of Spain and Italy are green with envy at the low borrowing costs enjoyed by Germany and Britain. For its five-year loans Britain pays roughly 0.7% and Germany pays 0.6%. Investors charge Italy 5.5% and Spain 6.4% for the same privilege. Proportionally the difference is enormous and it exists because lenders fear Spain and Italy could go the same way as Greece, defaulting on their obligations and leaving private sector investors in the lurch.

The EU is trying to dispel this fear and, by doing so, to make it more affordable for Spain and Italy to borrow the money they need. But so far they are fighting a losing battle. Brussels’ approval of a €100bn bailout for Spain in mid-June simply drew attention to the country’s troubled banks and raised the question of how much more support it might need further down the line.

In Greece the New Democracy party has managed to form a three-way coalition after the second general election in six weeks but the new government is almost certain to approach Brussels – and Berlin – with a request for an easing of the onerous austerity imposed as a condition of its financial bailout.

At the G20 conference in Mexico there were heartening rumours that Germany would subscribe to a €600bn (or €750bn, depending on the source) support fund for Spanish and Italian government bonds. Much as investors liked the concept, they have yet to hear any confirmation from the most important player; Chancellor Merkel.

So investors don’t like the eternal disarray in Euroland and the recycling of old pledges and reassurances. Equally importantly, they are nervous about the prospect of a further dilution of Britain’s currency and the close relationship of the UK and Euroland economies.

Paradoxically, the failed Greek election in early May marked the end of sterling’s ten-month rally. Since then it has made zero forward progress against the euro. Without some new and major development – on either side – the impasse is likely to continue.

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Bank recapitalisation agreed

Mr Rompuy said the deal was a "breakthrough"
Mr Rompuy said the deal was a “breakthrough”

Spain has received a lifeline from Europe as the direct recapitalisation of it’s banking sector was approved in the final hours of a long summit in Brussels.

German Chancellor Angela Merkel appeared to yield on tough reforms in exchange for rescue money after saying earlier that her country would not put up any more cash.

The European Council president, Herman Van Rompuy, said the decision was a “breakthrough that banks can be recapitalised directly”.

Spain had requested that any bailout be directed to the banks as it did not want to increase the government debt, and this decision appears to be exactly what they wanted.

The new agreement makes it clear that the EU’s existing bailout fund will put up the money until the new fund, the European Stabilisation Mechanism (ESM), becomes operational.

Eurozone leaders agreed to begin implementing the rescue plan by 9 July but warned that it could be the end of the year before the money become available.

Spanish newspaper El Pais reported that Mariano Rajoy didn’t want to comment on the agreement when he left but he was visibly satisfied. Italian PM Mario Monti recognised that the discussion had been “hard and full of moments of tension”, but that it had been worth it also adding that Italy did not intend to apply for a bailout.

German chancellor, Angela Merkel, said she was “very satisfied that we took good decisions on growth”.

The 17 leaders of the eurozone also agreed to a joint banking supervisory body and the full 27-member European Union agreed to a general long-term plan for tighter budgetary regulations and political union.

Please sir… I want some more!

Sr. de Guindos formally requested assistance
Sr. de Guindos has formally requested assistance

In a letter to the president of the Eurogroup, Jean-Claude Juncker, Spanish economy minister Luis de Guindos has formally requested assistance to recapitalise Spain’s financial institutions.

In the letter the minister said he wanted to accept the EU offer of up to 100 billion euros in capital to inject into the country’s banking sector.

“I have the honour to address you on behalf of the Government of Spain, to formally request financial assistance for the recapitalisation of the Spanish financial institutions that require it.” the letter said.

However, a specific sum was not mentioned as the minister said this was still under discussion but he hoped to have the details settled and the package finalised by July 9th.

Following two independent audits carried out over recent weeks Spain will carry out another stress test of its banks by October. This is intended to focus on seven lenders who do not currently requires help but who remain vulnerable.

This extra test will give Spain at least a couple of months to carry on negotiations for capital to be directed to the banks. The government wants to avoid taking the bailout itself and then channelling the money to the banks as this would affect public debt and could further increase the country’s borrowing costs worsening the crisis.

Spain’s Foreign Minister Jose Manuel Garcia-Margallo said Spain would insist on long maturities and low interest rates on the loans and that direct European aid to the banks was still an option.

“The way Spain complies with any and all of its commitments will be looked at with more attention than for a country which has not sought financial assistance,” said EU competition chief Joaquin Almunia yesterday.