Spain Real Time Data Charts

Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Spain related comment. He also maintains a collection of constantly updated Spain charts with short updates on a Storify dedicated page Spain's Economic Recovery - Glass Half Full or Glass Half Empty?

Tuesday, October 14, 2008

Some Reflections On The Plan As The Details Emerge

``It was the president of the European Central Bank who urged governments to take measures to help in financing and in some cases recapitalizing financial institutions,'' Zapatero said at a press conference in Paris today. ``We don't need to do this at the moment but if we do need to we will.''
Well, despite Zpt's "don't blame me, blame Trichet" speak, the plan has been introduced and we are starting to see some numbers, although we are still a long way short of getting actual drill-down details of what is involved, and how it is going to be financed, so apart from being mind-boggling, the numbers we are being offered are, in fact, almost meaningless. Take an ´x´ and attach a lot of zeros to it, 'x' can range from one to a trillion. Or put another way "I'm trumping you, now let's see if you can trump me". But, for what it is worth, AP are saying this:

European governments overcame their differences to put $2.3 trillion on the line
Monday in guarantees and other emergency measures to save the banking system in their most unified response yet to the global financial crisis.

Now $2.3 trillion does sound like quite a lot, so it would be interesting to know just how the number had been arrived at - other than asking "what looks so big that no one will dare say it doesn't seem to be enough - I mean, are there anything vaguely resembling detailed studies, and breakdowns lying behind all this? Only a thought. Anyway, according to the AP report about 250 billion euros ($341 billion) of the European pledges (I like that word, like in a charity auction) was earmarked to be spent on recapitalizing banks by buying stakes - but again we have no breakdown of who is doing what on this front.

The German package alone is said to be worth as much as 500 billion euros ($671 billion) - well, you know, they are thorough the Germans.

"We are taking drastic action, no question about it ... so that what we have experienced is not repeated," German Chancellor Angela Merkel told reporters.

Chancellor Angela Merkel's government has "pledged" 400 billion euros in loan guarantees, plus as much as 80 billion euros to recapitalize banks in distress and another 20 billion euros in the budget to cover potential losses from loans. The total value of the rescue package will amount to about 20 percent of German gross domestic product. The plan, which was agreed to by the German cabinet yesterday but will have to go through parliament for final approval, includes, among other provisions, reforms of Germany’s lending, insurance supervisory and insolvency laws.

The French government has "pledged" to provide up to 360 billion euros to help banks, 320 billion euros in guarantees for bank refinancing and 40 billion for bank capital injection, and the Netherlands will put up 198 billion euros in interbank loan guarantees, which will be added to the 23 billion euro fund set up last week to help financial institutions like Fortis. The Austrian government will set up an 85 billion-euro clearing house to be run by the Austrian Kontrollbank and this will provide cash by holding illiquid bank assets as collateral. Austria also "pledged" to buy banking shares if and when domestic financial institutions seek to sell new stock. It should not escape out notice that the Austrian stock market was temporarily closed last Friday afternoon after a rout of the Austrian banking sector (and particularly Erste Bank) which is especially exposed in Eastern Europe. In fact Austrian shares are down this year more than any others in the Eurozone in recent months.

Italy will guarantee some bank debt and buy preferred stock in banks if necessary, according to Finance Minister Giulio Tremonti , but he did not provide figures (which is hardly surprising given that if Italy is to avoid problems with the credit ratings agencies it has very little money indeed to spend without making direct cuts in services). Tremonti limited himself to saying that Italy would put forward "as much is necessary'' to shore up the country's banking system, and that the government was going to act on a case by case basis. Portugal has guaranteed $27 billion - or nearly 12 percent of annual GDP - in an attempt to encourage banks to lend to each other.

Spain's cabinet have approved measures to guarantee as much as 100 billion euros of bank debt this year (to be followed by an unspecified further amount next year) and authorized the government to buy shares in banks in need of capital. Prime Minister Jose Luis Rodriguez Zapatero was at pains to stress that no banks needed additional capital now and the measure was ``preventative and precautionary.'' As far as I can see a significant part of the money Spain is allocating will be used to buy up Cedulas Hipotecarias and other financial instruments which are due for "rollover" in the months to come.

Looked At In The Cold Light Of Day

Having now had the opportunity to sleep on all this overnight (always a good thing to do when taking decisions about important matters I feel) I still think (obviously) that Europe's leaders have done what had to be done, even if the weaknesses in what has been decided now do seem a lot clearer in the cold hard light of day (although, as I was at pains to stress yesterday, they probably couldn't have done much more at this point in any event). The numbers need to be to some extent vague (we wouldn't want to set the credit ratings agencies off looking too hard into the fiscal implications of everything just yet, now would we), and in any event waht is being offered is a guarantee, which it is hoped may never actually be called on. So rather than announcing the extent of their actual immediate involvement, what they have tried to do is put a limit on how far they are willing to go, in the hope that this quantity will be just too much for anyone in their right mind to try to bet against.

However, this kind of underwriting process is, by its very nature, open to all sorts of uses, and abuses.

To take just one immediate example, Banco Santander have this morning announced that they are taking over the 75% they didn't already own of the US-based Philadelphia-thrift Sovereign Bancorp - for some $1.9 billion. They already had a 25 percent stake in Sovereign and will now buy up the remainder in exchange for their own stock. Sovereign Bancorp has received a drubbing in the stockmarkets due to rising mortgage delinquencies as the US housing market has tumbled. Its stock has lost nearly two-thirds of its value in the year to date, and clearly given the money Paulson is offering may well look attractively priced as the US housing market steadies up. The question is, would Santander have felt in a position to make this acquisition before last Saturday's decision? There is no clear answer to this question, but it is a point at least worth bearing in mind.

The second example that comes into my (Barcelona based) head is a the sudden rum-rum of builders cranes and drills that I can hear in the streets around me, after weeks of what seemed like ominous silence. Is it only in my district, or are builders all over Spain now going back to work, following a sudden availability of loan extensions and overdraft rollovers from the banking sector? I know Zpt said we wanted to ease up the liquidity seize-up in the small business sector, but did it have to be precisely these small business that had their credit "eased up" (and not other, more currently relevant ones)? Bluntly put, what is the point of spending what are effectively scarce resources (and at the end of the day taxpayers money) building more houses, when there are already at least a million you still can't sell!

Now.... in the Santander case the point is, with loans and debts guaranteed at home, and Spanish property prices set to take a beating, why not buy up cheap US banks where the house prices are probably already near their bottom? But this is hardly what the average Spanish taxpayer thought they were giving the green light to. However, once you give a blanket underwrite to the banking sector, there is really little you can do to stop this, since banks are commercial enterprises, and have to do what is best for them and their shareholders. All of this has already come up in the context of the notorious Irish "excesses" in accessing ECB funding, and in - for example - the McQuarrie proposal (subsequently dropped) to take paper backed by Australian car loans over for presentation at the Irish central bank.

And in the "bailing out the builders" case, the position is even more scandalous, since what we really need on the table at this point is a plan to downsize the sector, and close down at least half the industry (compensating on the way the banks for some of their losses, since if not...), not a lease of life to what are already effectively the living dead. Spanish construction currently represent 11% of GDP. On any rational criteria, the most that can be hoped for 3 years from now is 5.5 % - 6%, and it is not unlikely given the excess of building we have had recently that we may be down to 3.5% to 4% (which is the level to be found, for example, in Germany).

So let us be clear, this whole package is a "lesser evil" situation. The greater evil would be a banking sector which went bust, with all the attendant consequences. But even though it is a lesser evil, there clearly are limits to what is acceptable, and someone should be policing all this, if for no other reason than to protect the hard earned contributions of the average Spanish taxpayer.

But, we also need to be clear, that this is just a first move. The banks are now "as safe as houses", and the bloodletting has stopped. But it is now essential that we use the breathing space which this provides to address the structural problems in the real economy, which are going to be large. Spain is about to go into the most serious recession in living memory, and there are two important groups of people who are not protected at this point: the builders and the private mortgage holders.

Both groups are now going to find themselves flooded with unsupportable demands on their finances. The former since there is now less than half the market there was for their product, and the latter because the value of what they own is going to fall, while their debt isn't. Simply issuing government debt to pay builders for housing which no one is going to be able to buy at cost price is no solution, one day or another the government will run out of the ability to issue debt. If the government issues debt it should be to save those construction companies which are "systemic", and viable over a longer term horizon, and to close down the rest. But to do this we need a realistic study of the future of the industry, and of what will, and what will not be viable. But where is this study?

And meantime the taxpayers money keeps flowing.

On the other front, the private household one, we need to think of all those young two-earner families who are already finding themselves in considerable difficulty paying their mortgages, and who may soon find that one or other of the wage-earners is out of work as the recession starts to really bite, and while the INEM unemployment payments may help for a year or so, what happens after that? I mean, we need to be clear, we are digging in for a long winter here.

So the next steps need to be a plan for downsizing permanently the construction industry, and some provision for "distressed" mortgage holders, just like we have been seeing in the US really.

And the big question is that all of this will cost money, and money is going to be in short supply in Spain over the next few years - especially if we are thinking of paying down the external debt, which we have to be really - and so we wend our way back upstream to the banks, and to the European support.

"I am not sure as you are that the plan is global. In the sense that if for
example a big spanish bank would default, that the german will use their
taxpayer money to refloat it." - from comments.

Well look, I agree with the comment above to the extent that nothing has been clearly spelt out, and what I think we may well see is a game of playing "chicken" here. I mean by this that, in the event that talking turns out to have been easier than acting, Spain no doubt will end up threatening that a systemic bank is about to go, and do this all the way up to the brink, and up to the point that the others feel they have no alternative but to provide support. Actually, Spanish politicians may be quite useless when it comes to some things (like being proactive rather than reactive) but this is a game they seem to excell at, so I suspect that they will find themselves in their element here, and I think they will get a result. Any going back on the committment not to let a systemic bank fail would have important consequences for the whole eurozone, and I will not say more than that at this point.

"Spain is making available euro 50bn. So Spanish cedulas are more of a problem!!
Now what is interesting is that the spanish plan makes euro 100bn "aval"
available until the end of 2008. So we will probably need more for 2009." - from comments

Well, yes, this is about the size of the problem. What they are hoping is that they can "restart" the economy in 2009, but I think this is a pipedream. We may well need this sort of funding every year as the securities are rolled over all the way through to 2012 and beyond. I doubt there is going to be any important wholesale market in Spanish RMBS-type paper before the correction is over, and this has all the hallmarks now of being a very long drawn out affair.

One of the main advantages of a Schumpeter-style "creative destruction" process, is that it is nasty, brutish, but short, and after everything has crashed you can briskly get on with the rebound. Spain's process is likely to be much longer than in either the US or Ireland, since property prices have been much slower to fall, and builders are not being allowed to go bust in any sizeable numbers, yet. But until house prices fall the market will not "bottom", people will not start buying again and the whole process cannot restart.

So we won't "bottom" here until much later than the UK and Ireland, and there will be no significant RMBS market till we do bottom. I mean, I think people have missed the very important point that the German Pfandebriefe, on which the cedulas were modelled, were introduced as part of the POST 1995 rescue package and bank bailout, AFTER property prices had already dropped, thus, since prices had already fallen (and in Germany property prices have been stuck more or less at this level since) these securities were "safe as houses" since the underlying asset was essentially stable.

"The major diference in point of views: some thougth the Spanish banks had only
a liquidity problem, others insisted on a solvency problem." - from comments

This point is very interesting, since this debate is obviously raging inside Spain at this moment. Personally I would say that the two points of view are valid, in the sense that what we have now (and have had since Sept 2007) is a liquidity problem in the banking sector. But what we will have when property prices drop and builders go bust is a solvency problem. So both views are correct, and the only thing we need to get straight to understand the difference between them is the timing involved.

As I keep stressing one of the points we should never lose sight of here are the implications of all this for the real economy. In only the latest example of such impacts Japanese automaker Nissan yesterday announced it was going to cut 1,680 jobs here in Barcelona, as the economic downturn across Europe has weakened demand for its larger 4X4 vehicles and trucks.

Update Wednesday 15 October

As I keep stressing one of the clear implications of last weekends decision is that fiscal policy will come under pressure, since the various respective governments are going to have to assume more debt, and it isn't obvious where the money is going to come from.

Ireland Takes The Lead

Ireland has been one of the first countries to actually come clean, and has announced that it intends to abandon European Union fiscal rules next year. The Dublin government is projecting Ireland's largest budget deficit in 20 years, as the economy slows under the weight of a housing slump and the international credit crunch. Announcing the budget for 2009, Brian Lenihan, finance minister, said the general government deficit would be "just above €12bn" next year, or 6.5 per cent of gross domestic product.

Under the current stability and growth pact rules, countries have to keep borrowing to less than 3 per cent of GDP through the economic cycle. Brian Lenihan said the "the international credit crisis has compounded and deepened the downturn in our construction sector and led to a fall off in consumer ­confidence".

Irish public finances, which had been in surplus for nine of the past 10 years, have now deteriorated by 7 percentage points. Ireland's finance minister projected that economic output would contract by a further 1 per cent next year, after a 1.5 per cent decine this year. Public debt is now set to rise from 25 per cent of GDP - one of the lowest rates in the European Union - to 44 per cent next year.

The worsening state of the public finances comes amid growing expectations that Dublin will also need to follow other EU governments and inject capital into its banking sector, adding further to public debt. Two weeks ago Ireland offered to guarantee the liabilities of its banks, but it is notable how Irish bank shares have generally failed to benefit from the price lift across Europe this week, so it now looks as if some form of recapitalisation or other will be unavoidable.

In the first official hint that equity injections by the government might be on
the cards, Pat Neary, the Irish regulator, told a parliamentary committee on
Tuesday that "the rules of the game are changing internationally". He
said: "Market expectations could push other banks to seek equity injections,
irrespective of whether or not they continue to meet their regulatory

With the Irish construction boom over, Christopher Wheeler of NCB stockbrokers calculates the collective bad debt charge of the three main Irish banks could reach 350 basis points of average loans in 2009 and 2010. He calculates the banks would need €14bn ($19bn, £11bn) of new equity to achieve a core tier one capital ratio of 9 per cent. This would put them broadly in line with UK banks under London's recapitalisation scheme.

And Greece Follows Close Behind

The Greek govenment has decided to issue additional treasury bonds, and is prepared to buy shares in banks to help support lenders and contain the impact of the credit crunch on the real economy, according to an announcement from Greece's finance minister earlier today (Wednesday).

"We will issue up to 8 billion euros ($10.93 billion) in bonds to support banks
... and are prepared to strengthen banks via share purchases up to 5 billion

And Greece's central bank governor also warned today that the capital adequacy of the country's banks would likely decline due to the current world-wide credit crisis.

"According to rough calculations, this year, towards the end of the year and early next year, Greek bank capital adequacy is likely to drop somewhat due to the crisis," George Provopoulos told reporters.

The sum of 28 billion euros ($38 billion) pledged in support measures amounts to 11.4% of Greek GDP according to the finance minister.

"With a combination of state guarantees, state participation and increased liquidity that can reach 28 billion euros we will help the banking system to overcome the credit crunch," Finance Minister George Alogoskoufis told reporters after a cabinet meeting.

Under the plan, the government is prepared to boost the capital of Greek banks by up to 5.0 billion euros by buying preferred shares with voting rights. The government also vowed to guarantee up to 15 billion euros of capital market loans by banks and stands ready to issue 8.0 billion euros (about 3.5% of GDP) of special bonds to be able to inject liquidity into banks.

So the Greek govenment is also to issue new debt to support its banks, in addition to any fiscal deficit it may already be running to offset the economic downturn. Of course the Greek government (debt to GDP ratio just over 100%) can issue the bonds, but it is far from clear how enthusiastic the financial markets are actualy going to be to buy them from a country which is also running a current account deficit of 13% of GDP.

Portugal Also Announces Revisions To Growth And Deficit Plans

Portugal’s government also announced today that it expects a sharp drop in economic growth and has put plans to continue bringing its budget deficit into line with EU rules on hold in its budget proposals for 2009. Fernando Teixeira Santos, finance minister, said today that economic growth was expected to drop to to a 0.8 percent annual rate this year and 0.6 percent in 2009. This is down from previous government forecasts of 1.5 and 2 per cent respectively.

The 2009 budget deficit target is being set at 2.2 per cent of gross domestic product, unchanged from 2008. The government had previously agreed with the European Commission to cut the deficit to 1.5 per cent of GDP next year as part of the ongoing adjustment. The new target marks the postponement of what have been largely successful efforts to cut an earlier substantial budget deficit, which had spiralled to 6.8 per cent of GDP in 2004. This breach of the rules is really quite minor at this point, and, although Portugal suffers from congenitally weak growth, and has a 9% of GDP current account deficit, a major recessionary slump in output (Spanish style) is not expected.

Zapatero Forsees Bank Restructuring On The Horizon

Bank mergers are likely in Spain and other European countries due to the international financial crisis, Spanish Prime Minister Jose Luis Rodriguez Zapatero said earlier today.

"During a serious crisis like this, it's likely that not only in Spain but also
in other European countries, you will see mergers or restructurings," Zapatero
said during a session of Congress.

Car Sales Down

European new vehicle registrations fell 8.2 percent year-on-year in September despite two extra working days, as the fall-out from the financial crisis "hits auto manufacturers hard," vehicle manufacturers' association ACEA said.

The credit crunch is evidently hurting the automotive sector's ability to finance its daily operations. Demand for new cars is weakening, and customers are increasingly reluctant to make large purchases, or unable to find lenders willing to finance them, according to ACEA.

Registrations for the 27 European Union member states (EU27) and EFTA countries, which ACEA said include Bulgaria and Romania and exclude Malta and Cyprus, totalled 1,304,583 units, the lowest September level since 1998, ACEA said.

"Usually, September is a strong month for car sales that tend to pick up after
the calmer summer months," ACEA said, noting that over the first nine months of
the year, sales for the region were down 4.4 percent.

Western European markets saw new registrations fall 9.3 percent compared with September 2007, to 1,211,308 units. Among these, the French and German markets resisted best, with France growing 8.4 percent after a 7.1 percent drop in August, while Germany's September sales edged down just 1.5 percent after falling 10.4 percent in August.

The steepest declines were in the UK market, where sales fell 21.2 percent, and in Spain, down 32.2 percent. Italy was down 5.5 percent.

The new European member states saw growth of 7.8 percent in September, with 93,275 vehicles registered.


François said...


Your blogging is getting from good to excellent.

However May I pick the fact that you said something that few would dare contending
save those constrution companies which are "systemic"

No industry is systemic. This is even more true for such a cash-consuming one.

Flooding the market create the very risk to transform real estate from an asset class into a liability.

I have seen that in the past, when I was younger in my inpoverished and overbuilt region.

That happened and may happen again:(

Edward Hugh said...

Hi Francois,

Just to clarify:

"However May I pick the fact that you said something that few would dare contending save those constrution companies which are "systemic""

By "systemic" I am making a kind of analogy here to the way the word in being used in the banking context. Spain clearly needs to retain some sort of (greatly reduced) construction industry or other - in this context there are some builders who need to be kept in business, but by no means all of them - as I am saying, at least half need to be closed.

The question is, who decides who is to live and who is to die. If this is left to a process of "amigismo", which is unfortunately the most likely result, the outcome will not be a good one.

What you need is a pretty brutal assessment here of what is "essential" (and this is all I mean by systemic - you need, for example some cement capacity, the whole industry can't simply be left to go to hell) and what is redundant, but by "systemic" I don't simply mean "large" - no one now is too big to fall.

Of course, this would be the rational way of doing things, but I don't have a lot of confidence the decision procedure will be a rational one.

Incidentally, Zpt seemed to be indicating in congress yesterday that a bank "restructuring" in Spain was now imminent. I thought the Spanish banking system was supposed to be near perfect :).

Anonymous said...

Hello Edward and y'all (as they say in Texas)
Let me share some readings I have been doing.
Where is the money coming from:
From The Daily Reckoning blog:
They can either raise taxes, (which they can`t do rigth now with the economic recession), Borrow ( which will raise long term interest rates and put homeowner even more underwater) or they can print.

I think they will do a combination of the first two, with some cut in social programs depending on their political afiliation. God help us if they print.
From Bloomberg: Bail out is big bad ugly from Jane Bryant Quinn: They will borrow worldwide.
But Low and behold this will not raise the deficit, as they will use an accounting gimmick and only account for the loss they may incur and not for the total borrowing. They call it scorred on a "subsidy" basis. I say it is the same mark to fantasy as Wall Street.

One point that has not been much talked about and that I think is important, is the new accounting rule: As accounting rules have been changed in the US, european banks have screamed and requested the same accounting rules for assets that are currently not sellable. Expect the same mark to fantasy. See a good article on this in FT: EU backs emergency accounting changes. Guess who favors them: The banks and the insurers, and who is against them:the regulators, the auditors. I thougth we needed more regulations!!! That all this, came from a loose and "laisser faire" attitude. AH, but the more things change, the more they remain the same. We never learn.

Car sales are for me one of the best indicator of how the real economy is faring. One data, the government cannot tamper with.

From Calculated risk: What really matters to know if the financial crisis has been controlled is the credit market. Even though the stock markets have rallied ( at least yesterday), the credit market continues to be stressed. TED spreads high,and yields on 3M treasuries very low.
One question: How come yields on 3 month "Letras del Tesoro" which would be the equivalent of treasury yield is not as low as in the states?. Or should I be looking for another yield? Euribor spread still at 1,6 used to be at 0,2 before august 2007.

Last but not least, La Caixa has already been advized to get ready to buy smaller entities.


Anonymous said...

High Edward

On a ligther note, I forgot to tell you how much I have enjoyed your post, most of all the comment on the thoroughness of the germans. They specified almost everything in their plan, even the amount they expect to loose. Compared to the italians that have specified nothing....
Welcome to EUROPE...

Edward Hugh said...

Hi again MDM,

"I think they will do a combination of the first two, with some cut in social programs depending on their political afiliation."

Yep, I'm inclined to agree with you, they will cut provision on the one hand, and issue bonds on the other.

I think the recent German experience with raising VAT to pay for part of the health service has had such a negative effect on consumption that no one will be rushing to do this again too quickly.

"One point that has not been much talked about and that I think is important, is the new accounting rule:"

I agree with you. This is important, and needs a lot of thought. I will try and follow the debate a bit on this, and post stuff as and when I am clearer how they intend to try to do this.

I suspect that this situation is, as they tend to say, "fluid" at the present time.

"One question: How come yields on 3 month "Letras del Tesoro" which would be the equivalent of treasury yield is not as low as in the states?."

I think this is a log running difference, rather like "how come the cost of one and the same car is different in Belgium than in Spain. There are lots of possible explanations out there I think, but I guess this is the kind of question they give to final year finance students. Actually Charles may know the answer to this if he happens by at some point.

"What really matters to know if the financial crisis has been controlled is the credit market. Even though the stock markets have rallied ( at least yesterday), the credit market continues to be stressed."

Well, I suppose that the best we can say is that at some stage the current bout will be controlled but that we are not there yet. The whole thing has now moved over to emerging markets, with eastern Europe being the worst hit at this point. The has been keeping me horriblt busy.

Also, things to seem to be "melting down" in China frighteningly fast. So ther emay be more shoes to drop yet.

But then we will move over to the recession/depression - whichever you care to call it. Even as stresses ease in the main credit markets, I don't expect the days of easy lending to come back yet awhile. So we are going to get some whopping recessions, and this is where you could get fiscal strains in some developed sovereigns (obvioulsy apart from Italy, Greece comes straight to mind, especially with shipping slowing as trade grinds down to a much lower level. I was reading about a Ukraine shipper who went bust today, since they had been using forward contracts on ships as another form of derivative, and the daily rental cost just fell through the floor. So expect problems in Greece from this quarter too, and from the unwind in Russia, since Greek banks - like Pireus bank - seem quite exposed in lending and construction finance there).

Basically, if one single developed sovereign gets near the rocks, expect a pretty short order additional bout of the present turmoil, with this time governments rather than banks under attack.

Edward Hugh said...

Oh, I just found the latest Moody's statement on the Spanish plan. Here it is in case anyone is interested.


Moody's Investors Service today commented on the new additional set of measures to support the Spanish financial system announced by the Spanish Government this week, in accordance with the coordinated Eurozone plan communicated on 12 October. This new agreement follows Spain's announcement last week of the creation of a EUR30 billion - EUR50 billion emergency fund to provide liquidity to the financial system and the increase to EUR100,000 of the bank deposit guarantee to be provided by the Deposit Guarantee Fund (Fondo de Garantía de Depósitos).

Moody's understands that the new measures detailed in the Royal Decree Law 7/2008 October 13 comprise the following elements:

- The approval of up to EUR100 billion worth of state guarantees for new financing made since 14 October 2008 by credit entities based in Spain. The Royal Decree specifies that the funding instruments that will be covered are commercial paper and bonds traded in the official secondary markets in Spain, but also mentions the possibility of extending the guarantee to other instruments such as interbank deposits. The maximum maturity of the above-mentioned instruments is limited to five years and the granting of state guarantees will be finalised on 31 December 2009.

- The authorisation, on an exceptional basis and until 31 December 2009, for the Ministry of Economy and Finance to acquire instruments issued by credit institutions based in Spain in order to strengthen these institutions' equity. The instruments mentioned by the Decree Law include preferred shares and participation certificates ('cuotas participativas'). On the same day of the publication of the above-mentioned Royal Decree Law, the Spanish government also published a Royal-Decree Law 6/2008 October 10, which sheds more light on the functioning of the EUR30 billion - EUR50 billion emergency fund announced last week. Additionally, this Royal Decree Law states that the 'healthy assets' bought by the emergency fund will be at market prices, and defines as 'healthy assets' those financial instruments that are issued by credit entities and securitisation funds and are backed by loans granted to individuals, corporates and non-financial entities. In its introduction, the Royal Decree Law specifies that assets acquired by the fund should be domestic and that the fund will favour the acquisition of assets backed by loans granted after 7 October 2008 in order to ensure lending activity to individuals and corporates.

'In line with Moody's previous commentary issued on 9 October 2008, the rating agency views these proposals as positive in the current environment and believes they will help to restore confidence in the financial system. However, Moody's also confirms that it does not anticipate wholesale rating changes for rated banks as these already benefit from external support to varying degrees,' explains Maria Cabanyes, Senior Vice President in Moody's Financial Institutions Group. In this context, rating actions (positive or negative) will continue to be influenced by the underlying credit and franchise fundamentals in line with Moody's established bank rating methodology, and will anticipate franchise strength following the scaling-back of these support programmes once the financial crisis abates.

Moreover, Moody's notes that, although the proposed government measures should help to ease the pressure on current liquidity constrains, Spanish banks are also experiencing a very rapid deterioration in asset quality driven (i) by their exposure to the real estate and construction sectors, which are undergoing a more pronounced and rapid correction than initially anticipated; and (ii) by an increasing decline in households' debt-servicing capacity as a result of both rising interest rates, growing unemployment, in some instances, aggressive growth strategies. Although Spanish banks display a relatively high risk-absorption capacity as a result of excess provisioning, Moody's notes that excess coverage is nevertheless rapidly declining and the fundamental credit trends in the system remain negative - and these factors underpin the likelihood of further downward rating adjustments.

The exception will be bank obligations for which a clear substitution of risk will be made by the government for that of the bank, as in the case of explicit guarantees. In such cases, Moody's is anticipated to de-link the risk assessment from the bank and apply the appropriate government rating to the specific obligations, upon detailed review of the guarantee terms.

Edward Hugh said...

Also, here's a report from the EU Observer about the new accounting rules MDM mentions.


The European Commission on Wednesday (15 October) changed EU accounting rules to help banks avoid sharp drops in the value of their assets at times of market volatility, such as the present financial crisis.

The move on "mark-to-market" accounting - made by the commission's accounting regulatory committee - has unanimous support from EU member states and will apply for 2008 third quarter corporate results, due to be published soon.

Under current mark-to-market accounting rules, company assets are valued on the basis of the price they would fetch if they were offered for sale on the market right now instead of what they would be valued were the company to hold on to them until maturation.

During the current crisis, banks in particular have seen their assets plunge in value because of mark-to-market valuation of "sub-prime securities" - financial assets based on loans to borrowers at risk of defaulting - with experts saying the banks' losses would have been much lower if they were valued on the maturation date basis.

The current practice can create a downward spiral in which companies seem to be insolvent.

But under the commission's new proposals, banks and other companies can optionally reclassify assets from the "held-for-trading" category to the "held-to-maturity" category, avoiding the trap.

"The current financial crisis justifies the use of reclassification by companies," the commission said in a statement.

"In these circumstances, financial institutions in the EU would no longer have to reflect market fluctuation in their financial statements for these kinds of assets."

The rule-change is in line with separate moves earlier this week by the International Accounting Standards Board, which crafts accounting standards used in some 100 countries.

The commission's move also comes just eight days after EU finance ministers first proposed the reforms at a 7 october meeting.

"By adopting these amendments, the commission has responded in record time to the request of the [finance ministers]," internal market commissioner Charlie McCreevy said.

Some critics of the manoeuvre however are worried that hedge funds, who would develop their own mathematical models to assign value to assets instead of comparing them to current market values, might exploit the new freedoms to artificially inflating asset value.

Edward Hugh said...

Here's a thoughtful comment from Global Insight about the debt implications of France's plans:

Although the plan, which aims to improve banks’ capital ratios and access to liquidity, is necessary, there are concerns about its impact on the country’s already badly damaged public accounts. Budget Minister Eric Woerth has, very optimistically, stated that it will not affect the government's target of a national budget deficit of 2.7% of GDP in 2009. Indeed, the 320 billion euro in guarantees should not have any impact on the public accounts, as long as no bank fails. However, the 40 billion euro set aside to recapitalise financial institutions will go onto the state's books as debt. Public debt is already projected to reach 65.3% of GDP by the end of 2008—well above the Maastricht Treaty limit of 60% of GDP—and, if fully utilised, the 40 billion euro will add approximately another 2 percentage points to this figure. Additionally, the cost of servicing this debt will surely have an impact on next year's budget. On the other hand, these costs may be counterbalanced by dividends and capital gains received from the government’s ownership of shares in the banks. Furthermore, if the measures are successful, they should help to stimulate economic activity, which may be reflected in higher tax receipts. As a result, it is impossible to determine with accuracy the final impact on the public accounts.

And here's another one from the same source, making it evident that part of the reason there are no numbers is that they can't openly push up the debt to GDP ratio too much.

In a deviation from the measures seen in France and Germany, Italy has not created a fund for its rescue plan, with Finance Minister Giulio Tremonti stating that, "As of today, we estimate that it's not necessary to have a predetermined figure." The package of measures announced includes a Treasury guarantee for new bonds issued by banks until 31 December 2009 and valid for five years. The guarantee will be supplied at market prices and requires the approval of the Bank of Italy. Italy, Europe's third-largest economy, has also lowered the minimum collateral guarantee required of banks seeking a loan from the central bank to 500,000 euro, which should provide banks with capital until the bottlenecks in inter-bank lending are loosened. The Bank of Italy will also engage in a 40-billion-euro debt swap, taking on inferior bank debt for government bonds that can then be used to obtain financing from the ECB. The debt swap is due to begin on 16 October and to last for one month. Italy is in stark contrast to other European nations by providing no firm capital commitments; however, the government's reluctance to create a rescue fund could partly be a reflection of the restraints imposed by its substantial public debt, which stood at 104% of GDP in 2007.