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 ESM
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)
fine camel-toe Juan has.
I know nothing about the Spanish banks but when you stand it up to our experience in Mick & Sean-land it could be gigantic.
@NWL
“it will need find €64m in its €1tn economy to fund the gap”.
I think you meant €64 bn. But what are a few extra noughts between friends. Here in Ireland, we certainly know how to throw zeros about especially if we borrowed/lent them and don’t plan on repayment.
@Brian, corrected, thanks!
Wow! That image of SF is so brilliantly cruel…….
“It’s all over now, Baby Blue.” Van Morrison says it all.
Soraya Sáenz de Santamaría, Vice President of Spain, is winging her way to DC tomorrow to see the other gods, mainly forgetful Timmy. Will not work, it is a solvency problem. Spanish real estate has A LOT further to fall and no one knows what is really on the books. Even the gaint, Santanter, is scared sh@#$tless and coming up with all kinds of crazy insentives to get deposits and selling off their LA interests to raise cash. Telefonica is pulling its shares from LA and German stock exchanges, on and on. One in four households have no income. Can you say peseta?
What does this mean for Ireland? I would suggest hooking up with Canada. Only four hours to Newfoundland. Strong currency, lots of natural resources and they love the Irish anyway.
You don’t think Don Quijote more apt
Good Morning All,
Noting the above, we will presently enjoy whether crisp new Airgead Nua notes in our pockets or an elimination of the promissory notes. I will be content with either outcome.
All the best to all,
Eric.
Meanwhile in Ireland, we go to the polls today for a vote that will barely be noticed outside of this small island.
Angela: “You’re telling me that Paddy is actually voting on the Treaty today?”
Secretary: “Yes, apparently so.”
Angela: “Why? Sure, even we’ve long-fingered it.”
Secretary: “…”
Angela: “Well holy god, there’s not sense nor meaning to them islanders.”
@Kieran Sullivan
Its ironic that a Nein to the referendum from Merkel may result (as a consequence of Bundestag changes to the treaty) if we vote yes today.
Perhaps this is the real reason Joan Burton and Richard Bruton expect a second outing.We will have to correct Merkels No and vote on her revised treaty.
The world turned upside down!
Today, I exercised a right that was fought for by my ancestors and voted “No”.
When politicians put the prerogatives of bondholders, of private entities like banks ahead of the needs and expressed wishes of their citizens, they may win friends in the councils of the European Central Bank and Davos, but it’s no way to nurse a wounded economy back to health.
Bondholders suffer losses all the time when the companies whose debt they purchase fail. Stockholders get wiped out first, and then the bondholders take a hit, with those holding unsecured bonds getting hit first. That’s how capitalism and markets work.
To pay for the massive bailout to ensure that bondholders of Irish banks remained whole, the Irish government has kissed both them and our euro masters on all four cheeks and inflicted vicious austerity on the Irish people.
It was time to call “Enough of this lunacy.”
I voted NO in the Fiscal Treaty Referendum.
I voted NO because all the “solutions” put forward by the Eurozone to date have failed so it doesn’t make sense that this solution will work either.
i wonder how exposed are the irish banks to the property crash in Spain? I am sure all those who got into developing and buying property in Spain( and other countries)did not borrow in those countries.SOOO!!!!
@CC, Some of the Spanish exposure has already been taken by the Irish banks. Most of the Spanish lending was made by Anglo and Irish Nationwide. NAMA now own the loans. A lot now depends on the valuations received on those properties when NAMA acquired them. There will inevitably be further writedowns in NAMA against these loans.
However, the valuations are not the only problem. Both Anglo and Irish Nationwide did not bother to get security over many of the underlying Spanish assets, relaying instead on giving “equity releases” against revaluations of Irish property assets already held. These revaluations were verging on the “Walter Mitty” at the time they were given and the money given against them is now irrecoverable. Many of the Spanish properties do not even have a proper lien on them at this point. NAMA may be relying on the good will of its debtors to collect anything from them.
So there are declining value, underwater, Irish properties, that once had equity which was used to finance more property, also now declining….in Spain…..
Talk about a throwing good money in front of a lawn mower.
A comment on here about post-soviet style property ownership/rights (big guys with bats/missing paperwork/Alsatians) is looking worryingly prophetic for parts of Europe.
@sf ca writer, The banks used the “equity release” method extensively – and not just for Spanish properties. Funds were given against inflated revaluations of property already held all the time. They were mainly given as deposits against further property purchases, but sometimes just to buy the odd plane or yacht. It was the ultimate predatory lending Ponzi scheme.
@wstt
I have seen and studied the devastation this can cause homeowners who used equity to upgrade.(lots of stateside up-close info on that and subsequent resolution if you want it)
But I suppose it slowly dawned on me that bigger foreign development deals, funded with help of Celtic tiger valuation equity release are doomed regardless of what happens in the foreign country, or at least would become prohibitively expensive to keep – probably lots of dodgy five year refi plans involved.
A situation like Spain’s makes it even worse.
The black hole has ballooned, and still they shovel in good money.
With this in mind:
I think forgetful Timothy will teach the euro dudes a thing or two about “forgive-refi and move on”.
Some proverbial good old yankee bullet biting on the menu.
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