Swinging back towards Greece

The European Central Bank
The European Central Bank

In the summertime when the weather is fine euro leaders take their break so after six months during which the unwelcome financial spotlight had shone on Spain, it swung in late August back towards Greece. It was not that investors no longer had any concerns about Spain, more that they find it difficult to panic about more than one thing at a time. With most of Europe – and most European political leaders – on their summer holidays investors recognised that there could be no realistic expectation of anybody doing anything to move the situation forward until September.

Mario Draghi, the president of the European Central Bank, did his best to improve things in late July. At a speech in London he said the ECB would do “whatever it takes” to preserve the euro, “and believe me, it will be enough”. A week later he reiterated his position after the monthly meeting of the ECB governing council. The Bank and the EU bailout funds would, together, apply their theoretically unlimited spending power to support the price of Euroland sovereign bonds, thereby lowering borrowing costs for Spain and Italy.

Investors were quite impressed by the strategy and the euro strengthened in early August. In the space of little more than a week it rose by nearly three cents against the pound and by a cent and a half against the US dollar. But then it all went cold. In the following fortnight the euro made no further ground against the dollar and it fell back by two cents against the pound. In late August the euro was a cent and a half higher against the pound and two and a half cents higher against the dollar than its position a month earlier. Compared with its levels at the beginning of June the euro was unchanged against the dollar and two cents weaker against the pound.

As they have during most of the last couple of years, investors are paying more attention to the political manoeuvrings in the euro area than they are to the minutiae of economic data. As long as the figures announced are within shouting distance of analysts’ forecasts they tend not to make waves. Only a handful of times have off-base ecostats sent currencies adrift.

On one occasion Germany and France reported better than expected figures for economic growth in the second quarter of the year. Investors became excited that Euroland as a whole might avoid a negative reading but it was not to be; euro area gross domestic product shrank by -0.2% in Q2.

At another time, Britain managed to deliver, on successive days, three sets of economic data that exceeded analysts’ forecasts. Inflation, unemployment and retail sales were all more positive than expected for the pound. Sterling went up on the news but was unable to hang onto its gains. Latest news also confirmed that the UK was far from recovering as UK disappointed with the release of data on public finances and factory orders. Unexpectedly public sector net borrowing went up by .6bn so the UK wants its people to spend more!! Not sure where the money is going to come from particularly when you consider UK banks are considering charging you for the “benefits” you get with your UK bank account.

So investors spend their time watching Brussels, Madrid, Frankfurt, Berlin and Athens for hints of what might – or might not – be coming next. In the immediate future they will be keen to find out whether Prime Minister Antonis Samaras can persuade Euroland’s movers and shakers to relax the repayment terms for Greece’s bailout borrowings.

The next scheduled big deal is the ECB governing council meeting in Frankfurt on 6 September. Having been wound up to expect overwhelming force from the ECB in support of Spanish and Italian government bonds, they will be looking for something serious. Experience suggests they will probably not get it, and that Sig Draghi will simply restate his master plan with a warning that national politicians must get on with their budget reforms and banking union. That same experience also suggests a meek response from investors, who have become accustomed to living on a diet of jam tomorrow.


Moneycorp – costadelsol@moneycorp.com or telephone +34 951 319 700

Spain may pay for Euro that serves others

Esteban Gonzalez Pons
Esteban Gonzalez Pons

Esteban Gonzalez Pons, the deputy general secretary of Spain’s ruling People’s Party, said Spain and Italy may end up paying for the euro while others benefit unless the European Central Bank brings down borrowing costs.

“We need the ECB to act like a central bank for the euro so that the euro doesn’t create a division between its members, with countries benefitting from the single currency and others like us being damaged by it,” Pons said in an interview on Onda Cero radio station today.

Spanish Prime Minister Mariano Rajoy, who returns to work in Madrid today after his vacation, is waiting for the central bank to set out the details of its plan to lower bond yields before deciding whether to request aid. ECB President Mario Draghi said the program would be in conjunction with Europe’s rescue funds and will likely be conditional on further measures to balance the budget.

Rajoy has already introduced more than 100 billion euros ($124 billion) of spending cuts and tax increases since December, driving the Spanish economy into its second recession in three years as unemployment rose to a record 25 percent in the second quarter.

“Part of the crisis is our responsibility but we are also paying for the single currency’s weakness,” Pons said. “Because we are among the strongest remaining European economies, Italy and ourselves are paying for the others.”

The Spanish government is cutting spending on health and education and Italy’s bond yields have surged even as it heads for a balance budget next year. By contrast, German exporters are generating 100 billion euros a year in additional sales as the debt crisis holds down the currency, making foreign sales cheaper, according to Nathan Sheets, chief international economist at Citigroup Inc. in New York.

Article source: Bloomberg.com

The battle of rhetoric

The battle of rhetoric across the Channel is heating up, not least in the tactical duel between Spain and the European Central Bank. The ECB says it will provide unlimited support for Spanish government bonds only if Spain makes a formal request for bailout aid. Spain says it will consider making that formal request only if the ECB is supporting its bonds.

For the moment though, this brinkmanship is not unsettling investors. On Friday they were obviously looking on the bright side, optimistic that September would bring the Club Med debt crisis to a tidy conclusion when all the leaders returned, refreshed, from their summer holidays. The euro was the day’s gold medallist, adding two cents against the US Dollar and two Japanese yen. Sterling lost a cent and a quarter to the euro but strengthened by one US cent and one yen. It is firmer against the Canadian dollar, weaker against the Aussie and unchanged against the New Zealand dollar.

The services sector purchasing managers’ index-fest awarded better-than-expected marks to Euroland and the States. The UK reading fell fractionally short of target at 51.0 but was still better than the euro area figures. Another positive surprise came from the US employment report. Non-farm payrolls rose by 163k in July, many more than the forecast 100k. Investors reacted by buying the dollar against the yen and selling it against the euro, the pound and the commodity currencies. The logic this time equated jobs growth in America with the euro’s imminent salvation to equal global economic joy and a shift from safety-first to profit.


Moneycorp – costadelsol@moneycorp.com or telephone +34 951 319 700

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.

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

Tighter regulations for Spain’s banks?

The European Central Bank
The European Central Bank

The last few days have seen the announcement of an immediate package of € 30bn from the Europe for injection directly into the Spanish Banks.

One of the areas the Spanish Government have had to agree to, to allow the rescue plan to move forward  is the immediate transference of regulatory power from the Bank of Spain to the European Central Bank.

Some will argue this is a gradual but clear chipping away of sovereign power and the start of things to come.

At ground level the more immediate questions are what impact this will have on mortgage lending in Spain.

Mortgage lending and advice in Spain currently is unregulated. Any company or individual can without prior experience or knowledge offer mortgage advice. Consumer protection on miss selling is nonexistent and Banks themselves are able to sell product without any clear transparency upfront, add unnecessary and unrequired linked products and few generate legal and binding offers of lending prior to completion.

Whilst most of the issues facing the Banks currently relate to commercial or semi commercial lending, and whilst there has been a tightening of processes and criteria’s post the boom, as has been seen in many other countries the regulatory focus will probably focus on the requirement to be able to document and evidence what has been done rather than actually ensuring what happens is fair reasonable and of sound risk.

It can be expected that in the medium term mortgage advice will be regulated and some form of qualification required. This in itself is a step in the right direction as long as it is implemented in a sensible manner rather than just being some form of bureaucratic process as is very much the case in the UK.

One can but hope the regulator will look at all the practices implemented by the Banks in terms of lending by providing far more consumer protection, insisting on more transparency upfront, without yet again tying the Banks up to a point where the only safe thing to do is a reject an application in case the regulator questions why you have lent.

In the short term the Banks will be wary of lending until the dust settles so this extra liquidity will definitely not find its way into the credit markets. The money will be used instead to prop up balance sheets and allow Banks to stay solvent as the recession deepens.

International Mortgage Solutions

Spain struggles on as an EU bailout gets closer

Guest post by Jimmy Kane

Will the Euro survive the year?
Will the Euro survive the year?

Spain’s economy is still slowly limping along, getting worse all the time. Concerns about the European country’s financial condition and mounting doubts about Europe’s ability to bail out the country dragged stock markets and the euro sharply lower on Wednesday.

Although Greece may be the epicenter of the debt crisis, Spain has been a growing source of stress and fear over recent weeks. Everyone’s watching Spain’s banking system and this microscope view has magnified last week after Bankia, the country’s fourth largest lender, announced it need 19 billion euro ($23.8 billion) in state aid.

Not surprisingly, investors are biting their nails that Bankia’s woes might translate across the Spanish banking sector, which suffered terribly from the collapse of the construction industry. This economic recession has unemployment at almost 25 percent, which just adds worry fuel to the concern fire. Some speculate Spain will become the fourth euro country to be bailed out after Greece, Ireland and Portugal.

Given that precedent, who’s to say the rest of the European Union wouldn’t follow suit? It’s not like Germany can bail out the entire continent. Naturally, the European Union’s executive office on Wednesday called on the eurozone to create a so-called “banking union” that can centrally oversee and bail out the sector if it needs to be. Lately, it’s a weak link in a very weak chain in the continent’s financial system.

However, bank failures have already overwhelmed the public finances of Ireland, which has forced it to take an international bailout. Will Spain be next? The European Commission recommended that Spain be given an extra year to meet its deficit targets, however likely or not that seems to happen.

The problem with the idea of bailing out a country the size of Spain is that its economy is double the size of the three countries already bailed-out and investors are skeptical whether a rescue operation can be mounted or would even do anything.

The general malaise hit stocks even harder, particularly in Europe, and the selling was aggravated after a VPRC poll for Epikaira magazine in Greece gave Syriza 30 percent of the vote, followed by conservative pro-bailout New Democracy at 26.5 percent.

This year, Spain’s stock market has been performing as terribly as a legless circus monkey on a unicycle. It dropped yet another 1.6 percent Wednesday – and the country’s cost of borrowing has rocketed higher to frightening levels. The euro itself fell another 0.6 percent to $1.2411, a tiny bit up from its nearly two-year low of $1.2405 hit earlier. Economic confidence also continues to slump.

Jimmy Kane is an avid traveler and Spanish real estate hobbyist. When he’s not traveling or studying the Spanish property market, he maintains a telecommunications website out of his hometown of Dallas, Texas.

ECB rejects Bankia “backdoor bailout”

Bankia bailout unacceptable
ECB says Bankia bailout is “unacceptable”

European banking officials have called Spain’s €19 billion bailout of struggling Bankia “unacceptable”.

The ECB said the “backdoor bailout” of the bank was not the solution and a proper capital injection was needed for the bank to survive, reported the Financial Times.

The Spanish plan had been to inject 19 billion euros into the banks’ parent firm in bonds which would then be swapped for cash at the ECB’c three-month refinancing window. This money was in addition to a previous 4.5 billion euro package the bank has already received making a total bailout of €23.5 billion, so far.

ECB officials also pointed out that the plan could breach an EU ban on ‘monetary financing’ although policymaker Ewald Nowotny said it is “up to national governments to help banks.”

The comments from the ECB will not help an embattled Spain whose borrowing costs have soared recently and are approaching 7%.

On Monday the risk premium demanded by investors to hold Spain’s 10-year bonds reached its highest since the Euro was launched.

Spanish Foreign minister Jose Manuel Garcia-Margallo said Spain would take care of billions of euros of toxic assets left over from the real estate bubble in 2008 without international help.

However, analysts fear the move could damage the country’s liquidity and worsen the country’s public finances which are already under scrutiny from investors and EU officials. It could also damage the ability of the state to finance itself.

Miguel Angel Fernandez Ordonez, governor of the Bank of Spain, announced yesterday that he intends to step down on June 10, one month earlier than the end of his mandate.

Prime Minister Mariano Rajoy also reiterated his comments that Spain’s government does not need outside financial help, although most economists disagree.

“The point about Spain is it’s going to need some external support of some form,” said David Owen, chief European financial economist at Jefferies.

ECB to assist Spanish bank audit

Luis de Guindos
Economy minister says Spain will not need EU help

The Spanish government has requested assistance from the European Central Bank (ECB) in the auditing of the accounts of Spanish banks saying they want to carry out the audit as soon as possible.

“The Spanish government has asked that the European Central Bank to be involved in this work of analysing the banks’ portfolios, and I believe that transparency is vital, and is a fundamental element to dispelling the doubts that exist about the Spanish banking system,” said Spanish economy minister Luis de Guindos as he entered the Ecofin meeting.

‘We have nothing to hide, we believe that the reforms we are carrying out will make the accounts more transparent, the Spanish government is very clear about that.”

The minister also pointed out that the government had already decided last Friday to ”appoint two independent auditors to analyse the portfolio of Spanish banks” adding that he is ”absolutely willing” to push the project through,  although he did not specify a completion date.

“It’s a job that will take time, but we will try to have it done in just under two months,” he said.

When asked whether Spain would ask for financial assistance from the EU De Guindos made assurances that this wont be neccessary.

“Nobody has spoken at all about going to the bailout fund, it is a matter of speeding up the independent evaluations”, he concluded.

Forget The Bond Auction, Spain is an Absolute Disaster

Bond auction appeared successful
Is the ECB propping up Spanish economy?

Well the financial world is awash with reports that the Spanish auctions went well. They did not. And you better believe the ECB and other Central Banks were involved in the buying.

Instead, Wall Street is using the auction (and just about every other announcement) to shred and those who sold calls in their usual options expiration games. This has been the norm for years, but the mainstream financial media continues to find “fundamental” excuses for market action that is clearly just manipulation and nothing more.

Case in point, if the Spanish auction went so well, why are Spanish Credit Default Swaps widening? Ditto for Spanish yields (the ten year is back closing in on 6%).

However, ultimately this auction means next to nothing. Spain is an absolute disaster on a level that few, if any, analysts can even grasp.

How else do you describe a country for which:

  • Total Spanish banking loans are equal to 170% of Spanish GDP.
  • Total Spanish private sector debt is near 300% of GDP.
  • Troubled loans at Spanish Banks just hit an 18-year high of over 8%.
  • Spanish Banks are drawing a record €316.3 billion from the ECB (up from €169.2 billion in February).

By the way, Spanish banks need to roll over 20% of their bonds this year too. Good luck with that. I’m sure it will all work out well. After all, the ECB and IMF have the funds to prop up Spain’s €1 trillion economy.

Oh wait, they don’t. In fact no one does. The IMF’s requests for more funds have been rejected by both the US and Canada (you really think Obama will fund a European bailout during an election year?). And the ECB has already blown up its balance sheet to the point that Germany and the ECB are growing hostile to each other (I’m sure this will work out well too).

Forget the auction and the spin being thrown about. Spain is a disaster. Its banking system is a sewer of toxic debts which the Spanish Government has attempted to fix by either merging insolvent banks together or spreading toxic garbage onto the public’s balance sheet.

This might fly in the US (or at least it has so far) where the economy is more robust and diversified than in Spain. But for a country whose housing bubble dwarfed that of the US and which is already posting unemployment of 24% (the highest in the industrialized world) and youth unemployment of 50%+, it’s a tough sell.

Oh, and Spain’s King decided to take time off from hearing about the Crisis to go elephant hunting. That should go over well with the Spanish populace, which is now facing austerity measures when the country is already in a Depression.

Just wait, once options expiration ends, we’ll be back to the fireworks. In fact, smart investors should take advantage of this ramp job to prepare for what’s coming.

By Graham Summers

Graham Summers is Chief Market Strategist for Phoenix Capital Research.

Article Source: Phoenix Capital Research