The key would be to have the bad bank receive it's assets at discounts that would already be attractive to the private sector.  50% may not be low enough for private foreign capital to buy.  The ideal scenario would be for the bad bank of buy the assets at a 75% discount and sell the assets to private investors in chunks.  The profit made by the bad bank would be passed on to Spanish taxpayers.

From Reuters

Spain bad bank assets to get 45-50 pct avg discount-sources

MADRID, Sept 24 | Mon Sep 24, 2012 1:20pm BST

(Reuters) - Lenders will transfer property assets into Spain's new bad bank at an average discount of 45 percent to 50 percent of original book value, three banking sources said.

The figure is obtained by applying an additional discount of 5 percent to 10 percent over the average writedowns of around 40 percent that the government has already forced banks to take on real estate assets, the sources said.

"As an average we could see further writedowns of 10 percent," said one of the sources - a manager at a Spanish bank.

A second source said the additional discount would be equivalent to a capital buffer lenders were asked to set aside earlier this year but which has now been made irrelevant by new, higher capital requirements.

By assuring that the new writedowns would be compensated by the capital buffer, Spanish authorities would protect banks from booking new losses.

However, the discounts will likely not be steep enough to attract foreign investors to the bad bank. That could eventually force the state to use more taxpayers' money to take over the toxic assets to later sell them off.

The sources cautioned that the discount was still being discussed and could vary depending on the type of assets that will be transferred, a key question that has yet to be answered.

The Bank of Spain and the European Commission, which are leading the negotiations and will have the final say on the pricing of the assets, declined to comment on the matter.

Year 3 of the European Crisis - Why??

We are fast approaching the end of the second year into the crisis in Europe with very little progress made.    The article below from Spiegel Online is the perfect example of why things have moved so slowly.

I'm often reminded that fixing a problem requires identifying the problem, not becoming fixated on the symptoms.  European Parliament President, Martin Schulz, does a great job of discussing symptoms in the article below, but quickly discounts any further discussion on the REAL problem - Too much debt which caused malinvestment which was driven by artificially low sovereign rates.  What Schulz views now as "interest rate speculation" due to "absurd...reactions of the so-called markets" may actually be markets re-calibrating towards the real level of sovereign rates.  Mr. Schulz doesn't seem to care how sovereign rates converged in Europe from 2002-2007.  We are only focusing on the rates diverging now.  I for one know that markets have a way of under-shooting and over-shooting due to emotional psyche of investors.  However, I also know that numbers have a way of telling a story.  

Mr. Schulz and the rest of the politicians in Europe, PLEASE step up and be leaders.  Focus on the real problems because it's the right thing to do, even though it is not the popular thing to do. 

Call for Political Union Now is 'Dramatic Mistake'

Maurice Weiss / DER SPIEGEL

European Parliament President Martin Schulz:

Leaders in Germany and elsewhere are making a big mistake by focusing on long-term EU reform when fast decisions are needed, says Martin Schulz, the president of the European Parliament. The German Social Democrat tells SPIEGEL that Europe needs to pool its debt, give the ESM a banking license and help Greece return to growth. 

SPIEGEL: Mr. President, "Frankfurt School" philosopher Jürgen Habermas has said there are only two possible strategies for Europe: a return to national currencies, or a political union. Is he correct?

Schulz: Yes, we should have introduced a political union together with the euro. That's something we failed to do, and need to catch up on. But that doesn't help us at the moment.

SPIEGEL: Why not?

Schulz: There's no point whining about missed opportunities. What we need right now is to act quickly and in the short term. I can't accept us getting lost in theoretical debate in the current situation. A restructuring of the European Union isn't pressing at the moment -- what we need instead is to solve very difficult problems in a short space of time.

SPIEGEL: You mean the crisis in southern European countries?

Schulz: Yes. We need economic growth in Europe and we need to find a solution for the excessive interest rates that are making it difficult for many countries to get their own debt under control. That is the crucial task for the coming months.

SPIEGEL: Germany is more interested in discussing the introduction of a political union.

Schulz: That's a dramatic mistake. As if a structural change would solve these short-term problems. That's the line of argument from the German chancellor, from the finance minister …

SPIEGEL: … and from the entire leadership of Germany's Social Democratic Party (SPD).

Schulz: From everyone in national-level politics, in fact, and not only in Germany. To me it seems akin to sitting in an airplane that's experiencing serious turbulence, while in the cockpit, they're debating improvements to the engines. Of course we're also dealing with a systemic political crisis, but that doesn't help us with the turbulence we're experiencing at the moment: no economic growth in Greece and interest rate speculation against Spain, Italy and Portugal.

SPIEGEL: What do you suggest?

Schulz: We need to reduce the interest burden on the affected countries in southern Europe. The best way to accomplish that would be with euro bonds. But that, too, is a theoretical debate, because the Netherlands doesn't want euro bonds, Finland doesn't want them and Germany definitely doesn't want them.
SPIEGEL: Which begs the question, why does Martin Schulz want them?

Schulz: Because we have a common economic and currency zone, and de facto this means that individual nations no longer have sovereignty over currency matters. Germany belongs to a common currency. Why, then, shouldn't we apply instruments of currency policy at this trans-national level?

SPIEGEL: Because the Maastricht Treaty established that no country would be held responsible for another country's debt -- the so-called "no bailout" clause.

Schulz: The Maastricht Treaty also stated that new debt should not exceed three percent of national economic performance. That's been taken off the table with a single stroke of a pen, by the same people who are now making the no bailout clause a sacred cow.

SPIEGEL: You're referring to the deficit rule breaches by your fellow Social Democrat, former German Chancellor Gerhard Schröder?

Schulz: Certainly Germany and France broke the rules, but if the treaty could be interpreted that flexibly back then, why couldn't the same be done now, for euro bonds? But it's no good, that's not going to happen and we need a different solution.

SPIEGEL: Do you have an idea?

Schulz: There are two options: Either we decide on a debt redemption fund, with which a portion of all EU countries' existing debt will be guaranteed and repaid bit by bit.
SPIEGEL: Or?
Schulz: Or we issue a banking license to the European Stability Mechanism (ESM), the permanent bailout fund, so it can borrow money from the ECB as any bank would.

SPIEGEL: The result of either approach would be that the affected countries immediately abandon their attempted reforms.

Schulz: I'm familiar with that argument, that so-called junkie policies get countries addicted to cheap money, but it's not true. Times are different now. In the past year, we've considerably tightened the screws on deficit offenders through a series of new regulations. Then there's the fiscal pact, which provides further possibilities for supervision. We've fulfilled the conditions we need in order to have a debt redemption fund or a banking license for the ESM.

SPIEGEL: Even your own party, the SPD, doesn't go that far.

Schulz: That may be, but I'm the president of the European Parliament. But aside from that, the SPD has behaved more responsibly on European policy than almost any other European opposition party. For German Social Democracy, Europe is vital to the national interest. And that's sensible.

SPIEGEL: Nor does the majority of the general population support pooling debt.

Schulz: Unfortunately, that statement is absolutely true, and it worries me greatly. What we need to do is explain to people what the alternatives are.

SPIEGEL: And what are they?

Schulz: Reintroducing the deutsche mark. It would be an extremely strong currency, which would make German exports much more expensive. The German automobile industry would no longer have to fear China, but rather France and Italy, Peugeot, Citroën and Fiat. Germany would end up too big for Europe, but too small for the world. That's something to think about for those demanding that Greece leave the euro zone.

SPIEGEL: So you still think, realistically, that Greece has a chance?

Schulz: If we keep going the same way we have been, it will be difficult. We won't get any growth in Greece by just imposing cuts. What I would prefer is a special economic zone for Greece.

SPIEGEL: That sounds vague.

Schulz: But it's not. Businesses will only invest in Greece if three conditions are fulfilled. First, there must be a clear commitment to the euro. No businesses will invest if they have to fear that Greece will leave the euro zone at some point. Second, the Greek government must be prepared to work together with European institutions in order to restructure the country.

SPIEGEL: And how will that look in practice?

Schulz: We need a growth agency in which European and Greek officials together identify projects to be supported by the EU. That provides a measure of control, but also a way of developing mutual trust. It would be a challenge for the Greek government, which would have to accept carrying out reforms together with officials representing the community to which it belongs. But these are not a hostile occupying force, they're instruments for providing help.

SPIEGEL: We're still missing the third of the three points you mentioned.

Schulz: Investment grants for businesses that go to Greece, for tourism, infrastructure or renewable energy.

SPIEGEL: The situation in Italy is hardly any better. The country is groaning under the weight of its debt.

Schulz: There you see how absurd the reactions of the so-called markets are. For a long time, Italy was run by one of the most unprofessional politicians anywhere. But there wasn't much pressure in terms of speculation. Now, in Mario Monti, Italy has the kind of leader you usually only get in Hollywood movies, a distinguished professor who won't even accept a cook at his residence, the Palazzo Chigi. Instead Monti's wife cooks their pasta herself -- and this is the man the markets don't trust.

SPIEGEL: It's not that the markets don't trust Monti, but rather that they fear when he leaves office, the usual sort of Italian politicians will return.

Schulz: That's politically motivated speculation. Monti is making cuts, but everything he manages to save goes toward covering rising interest rates. Then he says, My God, people, help me out here. And what do we answer? We say, you should make more cuts, Italy should figure out itself how to get by. That's not going to work. Let's be plain here.

SPIEGEL: Please do.

Schulz: Italy is one of the eight major industrial nations. What will happen if a G-8 country within the European Union goes bankrupt? Does anyone think Germany wouldn't be affected? Italy is one of our key markets. No, we're not going to get anywhere this way. We need a banking license for the ESM, to bring interest rates back down.

SPIEGEL: Ultimately, all of your suggestions boil down to the same thing: Germany should pay.

Schulz: Well, then let's talk numbers. The ESM, the European Stability Mechanism, is not funded by Germany alone. Twenty-seven percent of the bailout package comes from Germany. Italy and France together cover a total of 38 percent. That's reality. It makes no sense to say that everyone wants to get at Germany's money. You're paying too much attention to renationalized rhetoric in Germany.

SPIEGEL: But you can't deny that there are many people here on this continent who don't want more Europe.

Schulz: The vast majority of people support the idea of an enlightened, modern union of countries demonstrating solidarity. Film director Wim Wenders recently summed up the problem to me very well. He said the idea of Europe has become an administration, and now people think that the administration is the idea. But that doesn't mean we should give up on the idea -- it means we should change the administration.

SPIEGEL: If more and more national responsibilities are transferred to Brussels, at some point there will have to be a referendum in Germany too. Is that a danger or an opportunity for the EU?

Schulz: Unlike other countries, Germany has no experience with referendums. But when the German Constitutional Court reaches its decision on the ESM on September 12, the people may have to be asked. And that's a good thing. You have to let the people vote when it comes to a new constitution. I find it surprising, however, that many German politicians generally oppose referendums, but then when it's an EU matter, they immediately scream for a plebiscite.

SPIEGEL: As is the case with SPD leader Sigmar Gabriel. He too is determined to let the people vote on the EU.

Schulz: That's a risk. Referendums have always posed a threat when it comes to EU policy, because EU policy is complicated. They're an opportunity for those from all political camps who like to oversimplify things. European policy is always an interplay of rationality and emotion. The problem with us EU politicians is that we approach everything with cool rationality, and then wonder why we don't win people over emotionally.

SPIEGEL: You don't trust the people?

Schulz: No, I do, but it's not undemocratic to be skeptical. Referendums are a democratic instrument, but so are decisions reached in a parliamentary democracy. I advise extreme caution when it comes to referendums. In Germany too.

SPIEGEL: How can Europe become more democratic?

Schulz: Starting in 2014, there will be no Commission president without a majority in parliament. Government leaders will have to be guided by the outcome of EU elections. That's what the Lisbon Treaty says.

SPIEGEL: That means they would have to field candidates at the EU level.

Schulz: Correct, parties will field EU candidates. There will no longer be nationally-focused campaigns for EU elections.

SPIEGEL: German Finance Minister Wolfgang Schäuble and others suggest having the president elected directly by the people.

Schulz: I think that would be wrong. If parliament doesn't elect the president, who controls that president? Out of 27 member states, only France uses such a model. I'm opposed to introducing such a system at the European level. Imagine a German as president of the European Commission. If he or she goes to some particular country and says do this or that, it won't be very well received. The president quickly ends up being the evil German. But if the president is elected by and controlled by 700 representatives from all EU countries, that legitimizes him or her in a very different way.

SPIEGEL: Mr. President, thank you for this interview.

Interview conducted by Konstantin von Hammerstein and Gordon Repinski. Translated from the German by Ella Ornstein.

Link

PIMCO - The ESM: Saviour, Super SIV or End of the Road

PIMCO released an article on the ESM.  It is worth a read.  Key points are highlighted below.

Link

1. The 4 presidents in Europe:
1. ECB - Mario Draghi
2. European Commission - Jose Manuel Barroso
3. Eurogroup - Jean-Claude Junker
4. European Council - Herman Van Rompuy
2. The lending capacity of the ESM will be  € 500 billion.
3. As of August 29, 2012 the EFSF had €131 billion face value of bonds outstanding.
1. Of this total, the EFSF has placed  €45 billion in the primary market.
2. The remainder,  €85 billion, was essentially funded by the ECB through a roundabout transmission mechanism (ie: IOU from government to EFSF, then IOU from banks to governments, then banks use the bonds as collateral to borrow from the ECB).
4. The 17 stakeholders will have to pay in  €80 billion to the ESM by early 2014
5. Apparently when the ESM lends money to governments, that debt DOES NOT appear as a debt on the sovereigns' national account.
6. Germany's capital subscription to the ESM is initially capped at  €190 billion.  To put that amount in perspective, Germany's annual federal budget amounts to $300 billion.  Granted, the ESM contribution is not supposed to be an annual line item.
7. Since 1989, the new net borrowing requirement of the eurozone's southern countries averaged  €95 billion per annum.

More on Spain

Spain continues to be a concern on investors' minds.  Bloomberg has some charts today which show a good back drop as to why there is a concern.  Spain, by my accounts, will be the linchpin in the European saga.  Policy makers are going have to stand decisively on one side.  Without a fiscal union, Spain is simply TBTS (Too Big To Save).

Bloated Balance Sheets in Europe

Europe's Average Asset Age at Record Highs

It older post from Zerohedge which explains why trying to treat a solvency problem with liquidity doesn't work.  The old "extend and pretend" mantra of the banking sector seems to be closer to the edge.  The chart from Goldman would suggest the need for a Capex cycle in Europe to begin.  With the huge amount of economic uncertainty it is no wonder why we're not seeing a huge pick up in investment.

From Zerohedge:

"No Continent For Young Assets" - Charting The Root Of Europe's Problems: Record Old Asset Age

Submitted by Tyler Durden on 02/17/2012 10:22 -0400

• Central Banks
 
• default
 
• European Central Bank
 
• fixed
 
• Monetary Policy

It is no secret to those who follow the daily nuances of global monetary policy that the primary reason for Europe's deplorable fate has little to do with liquidity, and everything to do with an ever diminishing base of money-good assets, which in turn is a solvency problem when run through the cash flow statement and balance sheet. Need an explanation for the ever declining collateral thresholds by the ECB? There it is: assets in Europe are generating ever lower returns, which means that an ever lower inverse LTV has to be applied to them by monetary authorities in order for the asset holder to get some return. And with trillions in incremental cash needs, before all is said and done, the ECB (and various regional central banks, as was discussed last week), will be forced to accept virtually anything that is not nailed down as collateral for 100 cents on par (not amortized) value. Yet while observing the symptom is simple, the diagnosis is much more difficult. In other words, why is Europe's asset base getting progressively worse. Courtesy of Goldman we may have found the answer. As the following chart shows, the average age of assets in years in Europe, has just hit a record high. The implications of this are substantial, and explain so very much about the core problem at the heart of the European quandary.

it will come as no surprise that the return on an aged assets gets progressively lower the further it depreciates and amortizes. Further, the less cash available for capex, the lower the rate of asset replacement, and the older the prevailing asset base becomes. This all ends up in a toxic spiral in the context of continent deleveraging, where old assets create lower returns, leading to less cash, leading to less capex spending, all the while the liability side of the balance sheet stays fixed.

So as ever more cash is spent on interest outflows and debt maturities, the average asset age continues to get progressively higher, the PPE base of Europe gets even older, finally resulting in the situation Europe is in right now: a decrepit bed of Property, Plant and Equipment, amortizing ever faster, not being replaced, generating ever less cash.

Unfortunately, until a virtuous cycle begins where European (and soon American) firms start spending more on CapEx which more than offsets annual depreciation and amortization, everything else is irrelevant, yet the ongoing confusion of a liquidity with a solvency problem (because unlike Assets, liabilities do not "amortize" on their own absent a default of course) will continue.

Some Eurozone Related Articles

The 40 new hires by the ECB makes it appear like they are gearing up to become the EU wide regulator.  The Bundesbank's Target2 claims essentially means they have already bailed out Greece.

From Bloomberg:

ECB Drains 211.5 Billion Euros to Offset Government Bond Buys
2012-08-21 11:04:03.134 GMT


By Gabi Thesing
     Aug. 21 (Bloomberg) -- The European Central Bank said it drained 211.5 billion euros ($260.3 billion) in seven-day term deposits to neutralize the liquidity created by its government bond-purchase program.
     The Frankfurt-based central bank said 57 banks submitted bids totaling 446.8 billion euros. The marginal rate on the term deposits was 0.01 percent.
     The ECB sterilizes its government bond purchases to ensure they don’t fuel inflation. The ECB hasn’t bought any government bonds for 23 straight weeks.


ECB Funding Watch: ELA Highest Since July 27
2012-08-21 13:17:15.244 GMT


By Alexandra Harris
     Aug. 21 (Bloomberg) -- (Updates ECB data under “WEEKLY” subhead)
     Euro Area Funding Watch compiles daily, weekly and monthly functions that track money flows among the ECB and national central banks through the eurosystem.
  * DAILY
    * Banks borrowed EU1.19m overnight from ECB Aug. 20 vs EU949m Aug. 17, most since July 10
    * Banks deposited EU333b overnight w/ECB Aug. 20 vs EU327b  Aug. 17, most since Aug. 15
    * ECB’s current account holdings fall to EU537m Aug. 20 vs EU542m Aug. 17, least since Aug. 15
  * WEEKLY
    * ECB allots $9.3b to in 7-day dollar tender at 0.64% Aug. 15; allots $4.5b to 11 banks in 84-day dollar tender at 0.64%
    * ECB balance sheet falls to EU3.085t week ended Aug. 17 vs EU3.086 previous week; near record EU3.10t week ended July 13
    * ECB balance sheet lending to euro-area credit institutions falls to EU1.208b week ended Aug. 17 vs 1.21b previous; record high 1.26b week ended June 29
    * ECB margin calls fall to EU2.18b week ended Aug. 17 vs  EU2.23b previous week, lowest since June 22
    * ECB’s emergency liquidity assistance rises EU4.16b to EU218b week ended Aug. 17 vs EU214b previous week, highest since July 27
    * ECB has not purchased any sovereign debt for 23rd consecutive week
  * MONTHLY
  * Target2, debts/liabilities between euro area’s central banks:
    * Bundesbank claims fall to EU727b in July vs record EU729b June
    * Bank of Spain liabilities rise to record EU415b in July
    * Bank of Greece liabilities fall to EU105b in July vs record EU106b June
    * Bank of Italy liabilities rise to record EU280b in July  vs EU274b June


ECB Has Approved 40 New Hires to Fight Euro Crisis, Welt Reports
2012-08-21 06:14:01.597 GMT


     (For more on Europe’s debt crisis, see TOP CRIS.)

By Rainer Buergin
     Aug. 21 (Bloomberg) -- The European Central Bank has approved 40 new positions to help it fight the euro region’s sovereign-debt crisis, the German newspaper Die Welt reported, citing the bank.
     The ECB’s governing council made the decision in July without publishing it, the newspaper said. It was preceded by a controversy between the ECB’s executive board, which wanted to hire more people, and representatives from the national central banks, who opposed the executive board’s proposal, it said.

Greece to Request Extension on Austerity Measures

Samaras has apparently talked with some bankers and learned the old 'extend and pretend' tactics to "solve" the crisis.  He wants to extend the austerity plan by two years (until 2016) so that the budget deficit can be cut by 1.5% rather than 2.5% of GDP.  Despite a semi restructuring of Greece's debt, the government still can't get its act together and implement the necessary policies to get the country to grow again.  The sooner the EZ takes it's medicine, the sooner they can begin to recover.

From Spiegel:

Greece to Request Extension on Austerity Measures

REUTERS

Protesters shout slogans against reforms in Greece at an Aug. 1 protest.

Greek Prime Minister Antonis Samaras is expected to have a difficult mission next week. He wants to persuade German Chancellor Angela Merkel to ease strict austerity conditions on his country, and he may also need to ask for billions in additional aid. Speculation is also growing about a possible bond-buying program for Spain.

Antonis Samaras is showing a bit of courage at the moment. Next week the Greek prime minister plans to travel to Berlin, where he wants to personally persuade Chancellor Angela Merkel to loosen tough conditions for aid despite growing criticism of Athens in Germany. Samaras plans to seek a two-year extension, to 2016, of an austerity plan that was previously agreed with the so-called troika of the European Commission, the International Monetary Fund and the European Central Bank, the Financial Times is reporting, citing a document it has obtained.

The British newspaper is reporting that Samaras wants to first present the plan next week to French President François Hollande and then travel to Berlin one day later for a meeting with Merkel. Iannis Mourmouras, Samaras' chief economic adviser, told the newspaper the extension was justified because of the country's deep recession, with the economy set to shrink this year by 7 percent.

Under current agreements with its international donors, the Greek government must cut its budget by €11.5 billion ($14.2 billion) by 2014. The new plan would see Greece reducing its government budget by 1.5 percent of annual GDP instead of the previously foreseen 2.5 percent. This would spread the implementation of all the cuts over a four-year period.

According to the document cited by the Financial Times, Greece will also need additional funding of €20 billion to support its running budgets. However, Athens' proposal does not foresee it requesting that money from its European partners. Instead, it would be raised from an existing IMF loan or issues of treasury bills. According to the document, the country is hoping for a postponement of the start of repayments of its first EU-IMF loan from 2016 until 2020.

In Germany, Foreign Minister Guido Westerwelle of the business-friendly Free Democratic Party told SPIEGEL ONLINE he would be open to considerations to give the Greek government more time to pursue reforms. "The time that was lost in the Greek election campaigns must be dealt with," he said. At the same time, the politician, whose party is the junior partner in Merkel's coalition government, emphasized: "It is clear that no substantial changes can be made to the reform agreements."

Successful Bond Float

On Tuesday, Greece succeeded in auctioning off bonds worth €4 billion, although they come due in just three months. The last-minute auction had been conducted to cover a bond redemption due on Aug. 20 and also happened with indirect aid from the ECB, which allowed the Greek central bank to issue additional emergency loans to the country's banks, which in turn bought up the Greek bonds with short maturities. The money had been needed to buy time until Greece obtains its next tranche of aid.

Samaras' plan to delay Greece's austerity plan is a daring one given a recent sharpening of criticism against Greece. In Germany, politicians within Merkel's conservative government coalition are already talking openly about the possibility of a Greek exit from the euro zone. They also categorically reject any loosening of austerity agreements with the country.

Meanwhile, the situation in Greece is deteriorating rapidly and Athens is once again at risk of an uncontrolled bankruptcy. The country had been scheduled to obtain aid tranches from the previously agreed bailout, but the EU-IMF-ECB troika monitoring progress in reforms suspended disbursements in June. As long as it remains unclear what policies the new Greek government will pursue, the donors have said they will hold back the payment of €31.5 billion that is due. The troika is now expected to decide in September whether it will pay out that tranche.

EU Ready for Spain Action if Needed

The crisis in Spain also remained in the headlines on Wednesday. Amid speculation that Madrid may soon require a full-fledged bailout, the EU's economics commissioner said the bloc would be ready to provide aid to the country if needed.

"The European Commission and the Euro Group stand ready to take action if needed," Olli Rehn told broadcaster CNBC. "Concerning Spain, we have already started the implementation of the banking sector program," he said, a reference to the €100 billion bank bailout currently being provided to the country. "We will in parallel be prepared for any further action if it is needed."

Responding to calls for the ECB to resume purchases of Spanish government bonds, Rehn answered: "To my mind, it is clear that both the EU -- and I dare say the ECB -- are ready to take action once certain conditions are met and if there is a request by some member state to go into a primary-market purchase program."

The ECB recently said it is considering relaunching a bond-buying program, but only if countries first request aid from the euro bailout fund, which would require them to submit to strict supervision. Currently, the ECB can only purchase bonds on the secondary market, but the euro bailout fund is technically allowed to buy bonds directly on the primary market.

Some great commentary and charts from Zerohedge regarding the bailout that is already occurring through the ECB.

From Zerohedge

Spanish Bank Borrowings From ECB Continue Parabolic Rise

Submitted by Tyler Durden on 08/14/2012 08:00 -0400

• Bond
 
• European Central Bank
 
• Germany
 
• Italy
 
• Sovereign Debt

Even as the Spanish (and Italian) sovereign bond market foundered in July, hitting record yields following stark realizations just how insolvent Spain is, a more sinister development was taking place: Spanish banks, completely disconnected from the funding needs of the sovereign, were receiving a daily bailout from the ECB to the tune of over €1 billion. As the Bank of Spain released hours ago, in July Spanish banks borrowed a record €375.5 billion from the ECB, a new record, and a €38 billion increase from June. Sadly, as the red line in the chart below demonstrates, the parabolic increase in Spanish bank borrowings from what is effectively Germany, continues unabated. Indicatively this is comparable to the US banking system obtaining a roughly $500 billion rescue in one month for the 8th month running. Year to date, Spain has received €257 billion in ECB "borrowings" which we put in quotes as this money will obviously never be repaid, which means simply that Europe continues to be entrenched in the most diabolical version of Stockholm syndrome, where the hostages and the kidnappers have now realized they can only exist as long as the other is alive. If there was any good news, it is out of Italy, whose ECB bank borrowings rose by "only" €2 billion in July to €283 billion, and leaving Spain far ahead in the direct borrowing insolvency race. Of course, this was offset by the far more complicated ponzi scheme where banks can and continue to issue government-backed bonds. In fact, as reported yesterday, Italian sovereign debt rose to a new all time high. Because at the end of the day remember: sovereign or financial debt - it doesn't really matter in Europe, an asset-starved continent where the two terms are now effectively synonymous, and where the law of fungible funding and communicating vessels in the context of debt has never been more in your face.

Spain and Italy relative funding needs:

And cumulative:

Italy's Monti Warns Sicily May Default

According to an article by the Huffington Post, Monti is "gravely concerned" that Sicily may soon default.  Sicily's regional president, Raffaele Lombard, confirmed that he would resign from his post (as he promised on July 31).

Spiegel Nails It - We are Facing a Generation Conflict

As politicians and central planners present semi-solutions and claim mini victories on fighting the crisis in Europe, the real burden falls on the youth of the nation.  Whether it'd be less purchasing power or higher tax rates, today's youth will be the ones footing the bill.  David Bocking's article in Spiegel nails the issue at hand.  Keeping the promises of today's elderly will require breaking the hope of a generation.

'Trust No One Over 30!'Euro Crisis Morphs into Generational Conflict

A Commentary By David Böcking

DPA

Elderly Greeks at a political rally: Are older people partly to blame for Europe's debt crisis?

People vs. banks, north vs. south, and rich vs. poor? While all of these conflicts may be real, one of the biggest issues of the euro crisis is rarely discussed: Older people are living at the expense of the young, and it's high time the next generation took to the streets to confront their parents.

"Que se vayan todos," or "Away with all of them," became one of the slogans chanted by the tens of thousands of "Indignados" in Spain at protests last year. In addition to their eponymous outrage, many had one thing in common: Most were young and viewed themselves as victims of the crisis.

They might have been more specific and instead chanted: "All the old people must go!" This phrase would apply because, in many ways, the euro crisis is also a conflict between generations -- the flush baby boomers in their fifties and sixties are today living prosperously at the expense of young people.
Intergenerational equity -- measured among other things by levels of direct and hidden debts and pension entitlements -- is particularly low in Southern Europe. In a 2011 study of intergenerational equity in 31 countries by the Bertelsmann Foundation, Greece came in last place. Italy, Portugal and Spain didn't do much better, landing in 28th, 24th and 22nd place respectively. Currently, the unequal distribution of income and opportunities is particularly distinct:

• The employment market collapse has hit young Europeans much harder than older generations. In Greece and Spain more than half of those under age 25 are unemployed -- twice the rate of older workers. Things are even worse in parts of southern Italy, where youth unemployment has risen above 50 percent.
• One reason for this situation is unequal employment circumstances. Older Spaniards and Italians, for example, profit from worker protection laws preventing them from getting fired that are quite strong by international comparison. But almost half of young Italians and 60 percent of young Spaniards are on temporary employment contracts and can easily lose their jobs.
• The burdens and risks of the euro bailouts are also mainly borne by young people. Ultimately, growing national debts and bailout funds worth billions will be financed through bonds that won't be due for many years to come.

'Excess of Power'
Bankers and politicians aren't the only ones responsible for the crisis, either. Many from the older generations were accomplices in the faltering system. Almost every family in Greece had a member who profited from the bloated state apparatus as a civil servant. Baby boomers in Spain took on mortgages en masse, pushing their country into the debt crisis. And in Italy, politicians like Silvio Berlusconi were re-elected repeatedly because their tricks were apparently met with great sympathy -- pensioners have been among the former prime minister's most important constituencies.
So why aren't more young people getting outraged? There are signs that they may be starting to focus on the issue. In an article penned for the German dailyDie Tageszeitung, Italian writer Leonardo Palmisano wrote that the debate over job protection in his home country was "less about class than about age." On the one side of the issue are the precariously employed young people, and on the other side the baby boomers with permanent contracts and secure pensions. The "C/S", or "Cinquanta/Sessantenni," people in their fifties and sixties, are the "protagonists of the Berlusconi regime," he writes, holding "an excess of power in their hands, without having the necessary skills to lead the country out of the crisis."
Of course, not all southern European seniors are little Berlusconis. Many older people are suffering under the impact of austerity measures too. Nevertheless, in order to get honest answers about the crisis, it is important to pose questions about the responsibility older generations bear for the downturn.
In some cases, countries mulled uncomfortable labor market reforms that would have scaled back the privileges of older people. And they considered increasing taxes for the rich and a tougher battle against tax evasion, which has long been viewed as a trivial offense. Both are measures that would impact older, wealthier people in particular.
A Vicious Cycle
But little happened, and another trend has emerged instead: After some initial self-criticism, conspiracy theories have begun spreading among southern Europeans. Whether the boogyman is Wall Street or Angela Merkel, they find someone else to blame for their misery. Berlusconi has become particularly bold once again, claiming that only he can solve the problems as he plans anotherpolitical comeback.
So why aren't young southern Europeans rebelling more vehemently against this kind of sheer arrogance? The sad answer is that they would be biting the hand that feeds them. Lacking their own means in Italy, Spain, and Greece, young people -- particularly men -- are living with their parents well into their adulthoods. That, of course, makes it a lot more difficult to revolt.
Nevertheless, Germans should hesitate before taking an overly haughty view of the situation. The unsolved generational conflict in the south provides a foretaste of what could await Germany in the future, too. It was only a few years ago that the then "grand coalition," a government comprised of Chancellor Angela Merkel's conservative Christian Democratic Union and the center-left Social Democratic Party, pushed through a "pension guarantee" that prevents cuts to benefits for the elderly even if wages sink for young workers. Behind this decision was the fear there would be a backlash among outraged pensioners in the next election, but the additional costs will total some €18 billion ($22 billion), according to a study conducted by the Kiel Institute for the World Economy, a prominent German think tank.
Meanwhile, income distribution between generations in Germany threatens to soon become a "new social issue," warns a recent analysis in a journal published by the Munich-based Ifo economic institute. The disparity between what young and old people earn must shrink, it says. "Otherwise the conflict potential will increase."
Widespread Wealth Disparity
This gap is growing outside the euro zone, too. In the United States, household assets for those over 65 have increased by some 42 percent since 1984, according to the Pew Research Center. But those younger than 35 own 68 percent less than their peers did during the mid-1980s.

In the United Kingdom -- where youth riots last year shocked the world -- conservative politician David Willets published a book called, "The Pinch: How the Baby Boomers Took Their Children's Future -- And How They Can Give it Back" in 2010. Willets writes that the next generation will have to work harder to pay off their debts, making future generations the real losers of the current financial crisis.
But just because someone writes about youth problems doesn't make him one of their allies. Willets named university tuition as one factor behind the disappearing wealth of young Brits. However, shortly after his book was published he became Minister of the State for Universities and Science in the Cameron administration and had no problem tripling university tuition. Willets, incidentally, is 56 years old.
Ultimately, young Europeans will have to assert their own interests. Maybe they should resurrect a slogan from the protest movement of the 1960s: "Trust no one over 30!

Source

Spain's Debt Level and Maturity Schedule

Spain's debt level has increased to 922 billion euros from 850 billion euros at the end of last year.  Perma bulls will be quick to point out that Spain's debt to GDP ratio is better than the US at 68%...so where's the debt problem?  This is just the market overreacting again!  According to other analysis, Spain's REAL debt levels are much higher when you account for things like Spain's commitments to various "rescue" programs, other regional debt not recognized currently at the national level, and the very real liabilities it owes to other countries within  the European banking system.  When you take those factors into consideration, Spain's debt to GDP ratio looks more like 133 percent!

It appears that Spain still needs to raise about 68 billion euros through the end of this year and about 143 billion euros in 2013.  Notice how a majority of 2012 refunding was done, but just pushed out one more year.  The amounts in the first table below for 2012 looks eerily similar to the 2013 line in the second table below.  Spain is indeed getting shut out of financial markets, slowly.  Also notice that in the span of seven months, Spain's total debt level has gone up by 72 billion euros.

Here comes the cries for more QE and Euro-bonds.  I just love how the "street" thinks this will solve all problems.  If only it were that simple....


Spain's maturity schedule at the end of 2011

Source: Bloomberg

Spain's maturity schedule at the end of July 2012

Source: Bloomberg

What can change in two months? Apparently everything!

It wasn't that long ago that the Prime Minister of Spain, Mr. Rajoy himself, came out and said that Spain runs the risk of being shut out of financial markets.  However, today we have Spain's Minister of the Economy saying  that the country has time to wait for clarity on EU aid.  He believes that the administration has done enough so that no further adjustments will be needed.  I would like Guindos to be right, so that we can move on from this endless European debt saga, but I'm not holding my breath.

Apparently no one told Guidos that they still have roughly 82 billion of Euros that Spain needs to roll over this year.

Guindos: "We have time to wait for the details of the aid is cleared"

"There will be no further adjustments because we believe that we have adopted will be sufficient to meet deficit reduction targets," says Minister of Economy

YOLANDA GOMEZ / MADRID

Day 05/08/2012 - 3:03 p.m.

OF ST. BERNARD

The Economy Minister Luis de Guindo

Europe has lived a key week for the future of the euro. The whole world held its breath last Thursday to hear the recipes the European Central Bank President (ECB), Mario Draghi, had promised to put in place to save the euro. But in the end, bittersweet. Said act, that "the euro is irreversible," but leaves the governments of Spain and Italy the responsibility to take the first step. The Minister of Economy and Competitiveness, Luis de Guindos, told ABC this week has been key to the future of Spain and the euro , what is the position of the Government of Mariano Rajoy . A position that is defined in one word: caution. The Executive will study very well the conditions before a request for assistance.

The president of the ECB, Mario Draghi, has disappointed.Leave the door open for the purchase of debt but concedes a roof of governments in trouble. Now what? Spain Will ask for help?

-The European Central Bank President has sent two very clear signals.First, differences in financing costs between euro countries are not acceptable and that the high risk premiums in some countries are an obstacle to the proper transmission of monetary policy. And second, he is determined to intervene in the debt market in ways that will materialize in the coming weeks. Well, what is needed now is to wait and see how these formulas are realized. We have time before and we will act with caution.

'But the risk premiums of Spain and Italy are very high. And how long it can hold at these levels is small. To ask for a European rescue fund to buy our debt is the only way out of this?

-The risk premiums in Spain and Italy are responsible, in part, to concerns about the euro. So the solution is European. The European Council last June 29 moved in this direction with the agreements on banking supervision only, the fiscal pact and the promotion of economic growth. The move Thursday by the ECB is also part of the solution in this regard. The IMF estimates that 200 basis point risk premium reflects the uncertainties on the euro and are an additional cost of 12,000 million euros in next two years. In other words, if all the European machine is started and cleared the doubts about the euro, we will save those 12,000 million in interest on the debt. Are 1.2 percent of GDP deficit purposes, an important part of the adjustment in income and expenses that we had to do to comply with the path committed to Brussels. In addition, a significant reduction in the risk premium would also facilitate private sector financing.

'But Germany seems hellbent on this will not happen if Spain and Italy do not ask for help before. In addition, the permanent rescue fund may not act until the German Constitutional Court give the go-ahead next September. Could aid be requested at the time ?

-Like I said, we will learn the details and then we can have a precise timetable. We have time and can wait until these details are cleared. The Treasury is funding markets relatively well in the circumstances. We covered over 70% of gross financing requirements this year and the emission rate is still below what we had last December. Another issue is that a risk premium at current levels it is not acceptable or sustainable. It may be that some of the savings we get with the settings you have made, with the efforts that we ask the citizens, lost in the payment of debt interest. Against this fight and I'm sure they are laying the groundwork to return to rationality in the markets.

-The request for aid to Europe would be signing another MOU with new conditions.Will they have to endure more sacrifices Spanish citizens?

We do not know how it will implement the procedure. In any case, the substantial part of the adjustment is made. No further action because we believe that we have adopted will be sufficient to meet the deficit reduction path that we have committed to Brussels. The director of the International Monetary Fund (IMF), Christine Lagarde said the other day that Spain was already doing everything necessary, all reforms accurate. In many areas, from the European Commission to the ECB itself, we recognize those efforts. That is, we do our part and no doubt that we will continue doing. That this commitment is to put it on paper or not, is not important in my opinion. It is essential that your partners do not doubt your behavior and that Spain has given ample evidence that deserves that trust.

-A Germany is interested in the situation of tension experienced by the euro because it finances almost free. But can long maintain this situation without breaking the euro?

-It is clear that this is a malfunction of the market and when this happens, institutions have to intervene. It is what, after all, has said the ECB on Thursday. It has set a goal and now we have to say how to get there. And that goal is ensuring that the euro will continue as the single currency, which is an irreversible project.

-The German reluctance argument is always the same. If the risk premium is relaxed, countries will not do their homework. With the show that we have this week, in what has seemed a regional rebellion, do not you are giving reasons to be wary of Spain?

'I have this perception of Germany. From my meetings with his finance minister, Wolfgang Schauble, if I conclude that highly value the efforts being made by the Spanish society and its government to overcome the current problems. We have seven months in government and have not stopped to take action. Since the consolidation of the financial sector to the labor reform and fiscal consolidation. The autonomous communities as part of the Spanish, are in the same boat and are all aware that there is no way that reducing the deficit and debt. Apart from the tensions that may arise at any given time, know that the central government is helping them. But they also know that, above all, have to help themselves.

-The deficit in the first half of the year are not going very well. Will it be possible to meet the objectives with measures in place?

-The implementation of the budget, as you know, the Ministry of Finance. The measures, in effect, were adopted to ensure compliance with the deficit targets. No doubt we are in a context of economic recession and that this makes it difficult to balance the books. But I think with what has been done so far, as stated in the 2013-2014 program just adopted, will be sufficient to meet our commitments.

-Citizens are demanding many sacrifices, but we still see many excesses in the administration. There are still regional television, many companies and organizations ... You really can not speed up cutting these expenses? Can not lose weight the administration?

He can and must. But keep in mind that all public spending only 20% is managed by the central government. The remainder is the Social Security, communities and municipalities. Sure you can produce savings in the structure of the central state. For example, we announced a privatization plan and measures to optimize public housing estate. The share of communities, we agreed objectives and then are their governments and parliaments that decide how they get them. But yes, I think we should use all the room we have for example to a society like Spanish with many years of crisis behind him and is entitled to their leaders at all levels, guided by the austerity act.

-The Italian president, Mario Monti, a few days ago claimed that "already saw the light at the end of the tunnel." True, it was before he spoke Mario Draghi. Do you see that light as well or still some way to go?

I've always said that I will not create false expectations or talk of shoots or anything like that.But what I have clear is that, as in previous years sowed the seeds of the crisis we suffer today, today we are laying the groundwork for future retrieval. We have modernized the labor market so that adjustments in the labor market are not made primarily through layoffs. We highly channeled and cleaning up the financial sector to 100,000 million credit line provided to us by the European partners, on very favorable terms. And we have taken steps to ensure that we meet the path of deficit reduction agreed. The objectives that are good in themselves, for the Spanish economy as it has great growth potential. Our foreign trade, both exports and tourism, is behaving with great momentum even though we are in a recessionary environment. Spain registers and trade surplus with France, Italy and Austria, three of the most competitive economies in the world, and Germany are already close to equilibrium. We have a dynamic business network and a workforce that is the best prepared of history in Spain. These are our levers for a better future I hope to see relatively soon.

"The bad bank will be approved for brick on 24 August '

Cleaning up the financial sector is one of the most time tasks has led to the Minister of Economy and Competitiveness since he came to his office, located in Madrid's Paseo de la Castellana, on the eve of Christmas past. Since then, Luis de Guindos has approved two reforms, has nationalized major banking groups in the country, Bankia, and had to apply for financial aid to Europe in a line of credit that could reach 100,000 million euros.

- How is the process of restructuring the Spanish banking sector? Are you on track finally the ultimate solution to the crisis in the sector?

-The next day 24 this month, the Government approved a royal decree law which developed most of the commitments in the MoU (Memorandum of Understanding). In it we designed the outline of operation of asset management companies, commonly known as the 'bad bank'. Also agreed changes will be introduced with our partners regarding the structure of the FROB (Bank Restructuring Fund). Finally, the decree will address a new regulation on the marketing of complex products, such as preferred, in order to avoid possible abuses that have occurred in the past.