Above, artists impression of characters from the Spanish banking world that might become familiar to us over the coming months – Miguel “Los Dedos” Fingleton and Juan Fitzcaraldo
It was our own Minister for Finance, the late Brian Lenihan who said of the crisis confronting Ireland in November 2010 on the eve of the first bailout “I had fought for two and a half years to avoid this conclusion. I believed I had fought the good fight and taken every measure possible to delay such an eventuality and now hell was at the gates” Today it seems that Spain has finally arrived at the same staging post with its 10-year bond at record highs of 6.7%, with turmoil in its banking and bank regulation system, and with the ECB being distinctly unhelpful. Presumably the ECB is drafting a letter along the same lines as the one served on Brian Lenihan in November 2010, reminding Spain of the unprecedented assistance being graciously provided by the ECB to Spanish banks and warning that should Spain do anything to threaten bondholders then the ATMs might or might not be working next week.
Spanish funding requirements – how much and when?
Spain needs funding under three headings (1) for its deficit (2) to repay maturing debt and (3) to bailout its banks. The latest forecast from the EU is that Spainwill have a 6.4% deficit in 2012 meaning it will need find €64bn in its €1tn economy to fund the gap between this year’s income and expenditure. What about deficits for 2013-2015? Spainexpects to get back to a balanced budget by 2014 but it’s not looking promising, so easily add another €50bn for 2013-2015 deficits. The maturity profile of Spain’s €800bn of debt is difficulty to come by, but it has reportedly €118bn of maturing debt that needs to be refinanced before the end of 2012 – add say €80bn times three for 2013-2015 and it needs €358bn under this heading. As for the banks, who knows, and indeed who knows how much further Spanish property prices have to decline but the betting on here is that the sub-25% decline from peak is not the end of that story and that unprovisioned losses of about €250bn might be lurking in the books of Spanish banks. All of this comes to over €700bn.
Spanish bond yields
Today the 10-year bond reached a record of 6.7% which was equalled last November 2011 on the eve of the announcement by the ECB that it would pump colossal amounts of cash into the EuroZone banking system, a promise fulfilled in December 2011 and February 2012 when €1tn of lending for 3-years at 1% was hosed around Europe. There is no magic number which compels a country to seek a bailout – in Ireland’s case our 10-year bond was at 6.9% at the start of November 2010 when Ireland sought its first bailout and Portugal’s 10-year bond yield was 8% on the eve of its bailout. This has led some to conclude that 7% is the magic number, but in truth it could be less than that, especially given that the existing European Financial Stability Fund is lending to Ireland,Greece and Portugal at 3.5%. Why would Spain accept a situation where it paid 6.7% for its bonds when it might potentially access EFSF funding for 3.5%? Of course even at notional rates above 7%, a country might prefer to borrow small amounts in order to avoid reputational costs and conditionality that would accompany any bailout.
The Spanish banks
The last fortnight has seen a flurry of activity to help shore up Spanish banks which are widely believed to be harbouring nasty undisclosed losses stemming from the collapse of the property boom which was as much a feature of Spain’s economy of the 2000s as Ireland’s, yet so far Spanish residential property is down less than 25% from peak (compared to 50% in Ireland) and Spain’s paltry billions of bailout funding offered to its banks from its so-called FROB are dwarfed by the €68bn – equivalent to 45% of our GDP and over 50% of our more representative GNP – which the Irish bank bailout has so far cost. In Ireland Sean Fitzpatrick, the former chairman of Anglo, and Michael “Fingers” Fingleton, the former boss at Irish Nationwide Building Society have become the poster boys for our failed banks, but do we think the accusations of greed and incompetence against Irish bankers will not be reproduced as the Spanish crisis unfolds?
The European Stability Mechanism (ESM) is set to come into existence in July 2012, that is, in five weeks time. This is a year earlier than originally planned. Minister for Finance Michael Noonan advises that the ESM will be the main funding source for new applications from July 2012. If Ireland votes “Yes” tomorrow and if the Government ratifies the ESM Treaty by the start of July – something thrown into doubt by the apparent commitment by the Government not to ratify the ESM Treaty until Deputy Thomas Pringle’s court case to force a referendum on the ESM Treaty is heard in June – then we will be providing the ESM with €254m in July. The ESM was to have initial paid in capital of €80bn which would allow borrowing up to €500bn but if Spain does in fact need a €700bn bailout then we may need accelerate our contributions. And remember we may be on the hook for €11.145bn or more if lending from the ESM to bailout countries is defaulted on, as with Greece.
(Graphics above produced by Japlandic.com, contact here)