(Bloomberg) Spain’s inflation rate rose in July to the highest in almost two years as an increase in sales tax came into effect.
Consumer prices based on a European Union measure rose 1.9 percent from a year earlier after a 1.5 percent increase in June, the Madrid-based National Statistics Institute said in a statement today. That is the fastest rate since November 2008. A Bloomberg News survey of 14 economists gave a median forecast of a 1.7 percent increase. Spain, emerging from an almost two-year recession with the third-largest budget deficit in the euro region, has stepped up austerity measures in a move the government says may undermine the recovery. The main rate of value-added tax was increased to 18 percent from 16 percent on July 1, just as retailers were offering discounts of as much as 70 percent to attract shoppers to seasonal sales.
“Some price increases already happened in May and June but the largest bit will be in July,” said Giada Giani, an economist at Citigroup Global Markets in London. “Without the VAT hike, I’d expect inflation to remain very low.”
Deputy Finance Minister Carlos Ocana forecast in March that about 50 percent of the VAT increase would be passed on to consumers, with companies absorbing the rest. Inditex SA, the owner of Zara, said it wouldn’t pass on the increase. Spain’s economy came out of the recession in the first quarter, even as unemployment rose to 20 percent. Investors’ concern about a deficit of 11.2 percent of gross domestic product last year led to a surge in Spain’s borrowing costs. The government responded by approving a 5 percent reduction in civil servants’ wages in May and was forced to cut its 2011 growth forecast to 1.3 percent from 1.8 percent as a result of the austerity measures.
July 27 (Bloomberg) -- Spain sold 3.4 billion euros ($4.42 billion) of Treasury bills as its borrowing costs fell in the first debt sale since European Union stress tests of banks.
Spain today sold 971.4 million euros of three-month bills at an average rate of 0.672, compared with a yield of 0.913 percent at an auction in June, the Treasury said. It also sold 2.46 billion euros of six-month debt at an average rate of 1.144 percent, down from 1.577 percent last month. The risk premium on Spanish debt has declined since the Bank of Spain published stress tests on the nation’s lenders, showing a capital shortfall in the most extreme scenario of 1.8 billion euros. The government, which is trying to cut the third- largest budget deficit in the euro region while returning the economy to growth after an almost two-year recession, has already raised the funds that the savings banks may need, Finance Minister Elena Salgado said on July 23.
“The improved market mood is a consequence of the stress tests,” said Giuseppe Maraffino, a fixed income strategist at Barclays Capital in London. “The yields were quite attractive and that, plus the improved mood, explains the strong demand.”
The extra yield investors demand to hold Spanish 10-year bonds rather than German equivalents fell further after the auction. The spread was 137 basis points at 12:20 p.m. in Madrid, compared with 148 basis points yesterday and 170 basis points on July 22, the day before stress tests were published.
Spain aimed for the tests to improve its financial institutions’ access to capital markets. Spanish lenders borrowed a record 126.3 billion euros from the ECB in June, up 48 percent from the previous month, according to data compiled by the Bank of Spain. That compares with a drop of 4 percent to 496.6 billion euros for euro-area lenders as a whole. Jacobo Gonzalez-Robatto, chief financial officer of Banco Popular Espanol SA, said today that there are “signs” that wholesale funding markets are reopening for Spanish lenders.
Fitch Ratings cut Spain’s credit rating to AA+ on May 28, citing concerns about the economy’s ability to grow. Standard & Poor’s Ratings Services ranks Spain AA, while Moody’s Investors Service put the country’s rating on review for a possible downgrade on June 30, citing deteriorating growth prospects and the risk the government won’t meet its fiscal targets. As a result of the deepest austerity measures in three decades that include public wage cuts, a reduction in investment and a pension freeze, the government revised its growth forecast for next year to 1.3 percent from 1.8 percent. That’s still more than double the International Monetary Fund’s 0.6 percent forecast.
Even with Spain’s budget deficit at 11.2 percent of gross domestic product, more than three times the EU limit, its debt amounted to 53 percent of GDP last year, lower than in Germany and less than the euro-region average of 79 percent.
(Bloomberg) European stress tests on 91 banks will take into account bank losses only on government bonds they trade rather than those they hold to maturity, according to a draft European Central Bank document. “The haircuts are applied to the trading book portfolios only, as no default assumption was considered,” according to a confidential document dated July 22 and titled “EU Stress Test Exercise: Key Messages on Methodological Issues.”
MADRID (Dow Jones)--Five of Spain's unlisted savings banks, or cajas, have failed a European Union stress test and will have to raise more capital, while the leading listed banks passed with flying colors, test results showed Friday. The EU tests covered 27 lenders from Spain, and found that the five weakest lenders would see their Tier 1 capital ratios fall below 6% in the event of new sharp deterioration in economic and credit market conditions.
The test, carried out by the European Union's Committee of European Banking Supervisors, examined the banks' balance sheets, compliance with capital rules and how their exposure to the sovereign debt of 30 European countries would affect them in certain scenarios. The two largest Spanish banks, Banco Santander SA (STD) and Banco Bilbao Vizcaya Argentaria SA (BBVA), showed they have a strong capacity to resist higher losses, even in the most adverse scenario that regulators tested them for. Both benefit from strong earnings generation and they have robust capital levels, allowing them to cover the sharp increase in loan losses that would come with a double-dip of the economy.
In the most adverse conditions envisioned in the tests, Santander's Tier 1 capital ratio would remain at 10%, the same as at the end of 2009, the results showed. BBVA's would drop to 9.3% from 9.4% at the end of 2009. Tier 1 is a widely used measure of a bank's capital strength, consisting of equity, preferred shares and retained earnings. Supervisers had set a cut-off ratio for Tier 1 at 6%. Banks that drop below this ratio in the stress scenario will be required to raise new capital. The findings were hardly a surprise. The health of the cajas sector has been a consistent worry among investors ever since the home-grown real estate bubble burst and the economy fell into a recession. Investors polled by Goldman Sachs before the release had expected Spain to need to raise the biggest amount of new capital among European countries as a consequence of the stress tests. The cajas, which are mutually owned and unlisted institutions, have had trouble raising capital during the crisis because arcane regulation hindered them from issuing voting shares. However, recently approved legislation will allow them to seek listings and demutualize if they wish to tap markets for private capital.
The results of the European Bank Stress tests have been widely anticipated. However, there appears to be very little consensus about the outcome, how much will be raised and what the impact will be. To help gain more insight into current expectations ahead of the release, the Goldman Sachs Banks team and European Portfolio Strategy team conducted a survey, which closed 24 hours ahead of the planned stress-test results release. 376 participants completed the survey, with a broad mix by geography (Europe 66%, US 23%, Asia 7%, other 3%), type of institution (hedge funds 28%, long-only investors 38%, other 34%) and investor type (financial specialists 36%, generalists 64%).
The participants of the stress test expect:
- 10 of the 91 institutions will not pass the stress test (for a pass rate of 89%), as per the average response.
- Consequent capital raisings expected: Below €10 bn (9% of participants), €10-25 bn (33%), €25-50 bn (35%), €50-100 bn (18%), above €100 bn (5%). This implies a mean (at the middle of each range and assuming >€100 bn = €100 bn) of €37.6 bn.
- 63% believe that the amount of capital raised will leave banks adequately (or overly) capitalized, while 37% see a capital deficit even post the stress test.
- Banks domiciled in Spain, Germany and Greece are expected to raise the most fresh capital.
- The source of capital is expected to be split between the public (51%) and private (49%) sector.
- Opinions remain split on the performance of the sector in the 3 months following the stress test, with 38% expecting outperformance, 26% underperformance and 36% in-line performance.
Which banks passed or failed the EU stress tests?
Results of so-called stress tests, which will assess how banks would fare if economic conditions worsened and sovereign debt holdings declined in value, are due on 91 banks on July 23.
Many supervisors, bankers, ministers, analysts and sources have commented in recent weeks on what they expect the stress tests to show for banks in the sample. Below is a collection of those comments, sorted by country.
*** COUNTRIES IN MARKET FOCUS, ALPHABETICALLY ***
FRANCE - PASS EXPECTED
BANKS PARTICIPATING: BNP Paribas (BNPP.PA); Societe Generale (SOGN.PA); Credit Agricole (CAGR.PA); BPCE, parent of Natixis (CNAT.PA).
OFFICIAL COMMENTS: Bank of France head Christian Noyer said there was "no reason" to believe French banks would fail Europe-wide stress tests as they were regularly tested by the regulator. (Europlace business forum, July 6).
WHAT ANALYSTS SAY: Most expect all banks to pass. Some brokers using a harsher stress test than CEBS have cast doubt on Credit Agricole's capital strength.
GERMANY - 1 FAIL, 13 PASSES EXPECTED
BANKS PARTICIPATING: Deutsche Bank (DBKGn.DE); Commerzbank (CBKG.DE); Hypo Real Estate [HRXGe.DE]; Landesbank Baden-Wuerttemberg; Bayerische Landesbank [BAYLB.UL]; DZ Bank (DGBGg.F); Norddeutsche Landesbank; Deutsche Postbank (DPBGn.DE); WestLB [WDLG.UL]; HSH Nordbank [HSH.UL]; Landesbank Hessen-Thueringen; Landesbank Berlin (BEBG.DE); Dekabank Deutsche Girozentrale; WGZ Bank (WSTGgb.F)
COMMENTS: With the exception of nationalised Hypo Real Estate no German bank in the test is expected to fall below the minimum capital threshold required to pass the exercise, several sources close to the banks told Reuters.
WHAT ANALYSTS SAY: Apart from Hypo Real Estate, some analysts using diferent stress test assumptions have said Commerzbank would need more capital in their scenario. [ID:nLDE65K0PV]
GREECE - PASS EXPECTED
BANKS PARTICIPATING: National Bank of Greece (NBGr.AT); EFG Eurobank ERGr.AT; Alpha Bank (ACBr.AT); Piraeus Bank (BOPr.AT); Agricultural Bank of Greece (AGBr.AT); TT Hellenic Postbank (GPSr.AT)
OFFICIAL COMMENTS: Greece's central bank chief, George Provopoulos, said he expected the country's lenders participating in the stress test to "smoothly pass" the exercise. (Newspaper interview, July 17: )
WHAT ANALYSTS SAY: Citi analysts say NBG would need capital in their own stress test scenario. [ID:nLDE65K0PV]
IRELAND - 1 PASS, 1 CONDITIONAL PASS EXPECTED
BANKS PARTICIPATING: Bank of Ireland (BKIR.I) and Allied Irish Banks (ALBK.I)
OFFICIAL COMMENTS: Finance Minister Brian Lenihan and central bank Governor Patrick Honohan both said that the two Irish banks had already passed domestic stress tests that were tougher than the EU test.
Portuguese lenders may require €5.9bn, the Irish Independent reports.
“We view the upcoming release of the European banks stress tests as a potentially important inflexion point for the market,” the analysts writes.
Adding: “They may ease concerns by ensuring that the sovereign crisis and a likely slowdown in European growth will not result in widespread bank failures.”
Investors are concerned that soured loans to real estate developers and holdings of bonds issued by governments of nations on Europe‘s periphery mean some lenders may have burned through their capital.
The European regulators are running stress tests on a total of 91 of the biggest banks, representing 65% of the European financial industry.
Moody's cuts Ireland on bank, growth worries
The rating agency's one-notch drop to Aa2 came a day ahead of a scheduled sale of up to 1.5 billion euros of Irish debt, putting Moody's on par with rival agency Standard and Poor's AA rating and still one grade above Fitch.
The downgrade, which a minister said provided no surprises but which briefly weakened the euro against the dollar and hit European stocks, prefaced a sale of six- and 10-year bonds worth between 1 billion and 1.5 billion euros at Ireland's regular monthly auction.
Moody's also changed its outlook to stable from negative, and much of the hit to Irish bond markets was short-lived.
The spread of Irish 10-year bonds against their German equivalent widened 10 basis points on Monday from Friday to 301 basis points, their highest since July 2, before narrowing to 295 bps.
Ireland to auction bonds after Moody's downgrade
Moody's, which dropped the rating by one notch to Aa2, also changed its outlook to stable from negative, which helped make much of the hit to Irish bond markets on Monday short-lived.
Analysts expect the National Treasury Management Agency (NTMA) to meet its target to sell between 1 billion and 1.5 billion euros of 6- and 10-year bonds on Tuesday.
The NTMA almost invariably hits the top of its target size range but borrowing costs could rise compared with similar auctions in May and June as fresh bad news has emerged since then concerning Ireland's ability to cut its budget deficit.
The cost of bailing out nationalised Anglo Irish Bank [ANGIB.UL] last year gave Ireland a budget deficit of 14 percent of gross domestic product, the highest in Europe, and this could rise to 20 percent this year, the state-funded Economic and Social Research Institute (ESRI) said last week.
And while the Irish public has so far grudgingly accepted fiscal tightening, a senior official in Prime Minister Brian Cowen's governing coalition said on Sunday voters might not be ready to accept all the further cuts on the way.
The International Monetary Fund has also questioned Ireland's ability to meet an EU deadline to get the deficit down to 3 percent of GDP by 2014
19th July 2010However, Industry Minister Miguel Sebastian said that after the victory in South Africa experts raised the economic forecasts and ratings of Madrid, which has a positive impact on the image of Spain in the international market and helps the country to end the year in the black.
As a result of another Spanish football victory, the country can expect some recovery in the area of sports tourism. But in the current situation it is doubtful that the government or Spanish business ventures decide to make multimillion-dollar investment in sports infrastructure, which the country has no issues with. Moreover, the share of the sports industry in the structure of the national economy is not high enough to become a driving force for growth. Thus, this is simply a wishful thinking of the Spanish government that is trying, at the same time, to get the most out of the victory of its national team.
Moody's Cuts Portugal Rating by Two Notches
Spain hope for economic boost from World Cup glory
Where some teams chose grim defense, Spain stuck to its attacking philosophy at this World Cup and, in the end, reaped the biggest reward there is. Where others hoofed balls up field and hoped, the Spanish passed, passed and passed until the goals came. In becoming the first European nation to win the World Cup outside of Europe, Spain showed that beautiful football can be winning football, too.
Those who follow the stock market or finances in general know that there has been a huge European Debt Crisis that has been going on for quite some time. In April, Spain saw their credit rating downgraded which in turn caused great fear among the Spanish. Since November of 2009 the etf that tracks the Spanish stock market is down from around $50 to $37. This is after a quick two week run up from $30 which included the run towards the World Cup Final.
While it cannot be said that the World Cup Final run has been the sole reason for the move higher in the stock market, there are many reasons to believe that a World Cup Final championship can help the economy of Spain. On Sunday alone there where millions of Spanish out and about spending money. They flocked to Madrid or a local bars to watch the game. In the long run, a World Cup Final win does not mean that Spain will recover and immediately start to see economic growth. However, It does mean that a lot of money will be spent over the next few weeks which in turn could greatly help many small business spread throughout the country.
The triumph in the final at Johannesburg’s Soccer City yesterday, could add as much as 0.25 percentage point to annual economic growth for Spain, from increased consumer spending, according to ABN Amro Bank NV economist Hein Shotsman in Amsterdam. For Spain, that could mean expansion this year instead of a projected contraction.
Spain's Cup joy gives relief from economic woes
Thousands of Spaniards poured onto the streets across the country late on Wednesday, draped in yellow and red flags, to celebrate the win that took Spain to their first World Cup final against Netherlands at Soccer City in South Africa on Sunday. "We're incredibly proud. This is a welcome distraction from the crisis and from the awful government we have. It lifts peoples' spirits," said 63-year-old Loria Alejandrez, a civil servant who watched the match at a public screening outside Real Madrid's Bernabeu stadium.
In central Madrid, traffic came to a standstill as fans lay on pedestrian crossings, clambered over monuments and pretended to be bullfighters to cars, using Spanish flags as capes. Cars and buses beeped their horns and fireworks exploded.
Spain, suffering the highest unemployment in Europe and a debt hangover from a decade-long property boom, has introduced tough austerity measures including public worker wage cuts in efforts to stave off a Greek-style debt crisis.
The cool-headed display of teamwork by the Spanish side was in sharp contrast to the bitter political fighting that has dogged the weakened Socialist government's attempts to enforce unpopular reforms under pressure from international markets.
"We need something to show we can do things together instead of bickering all the time," said Pedro Schwartz, economist at San Pablo University in Madrid.
HUGE AUDIENCE
The match was screened on 14 million Spanish television sets and captured over 80 percent of the television audience on Wednesday night, a media consultancy said. Prime Minister Jose Luis Rodriguez Zapatero said he had watched the match nervously with his wife and daughters and the players had brought Spain great happiness in a difficult time.
"Our moment has come in football and I think this comes at a good time to lift the confidence and self-esteem of the country," he said in a radio interview.
Confidence in Spain from financial markets has wilted in recent months, driving up the government's cost of borrowing. The fact the player who headed the winning goal, central defender Carles Puyol, is from the north-eastern region of Catalonia, gave an extra boost to feelings of Spanish unity. The Catalans speak their own language and are seeking more political independence from Madrid.
Spain is enjoying success in the world of sport, with a Wimbledon victory for Rafael Nadal this year and Spanish basketball player Pau Gasol helping the Los Angeles Lakers win their second successive NBA championship.
However, the grim reality of 20 percent unemployment and some of the highest personal debt levels in Europe coupled with the prospect of cuts in wages and benefits kept heads level at a Madrid job centre.
* Cajas changes to be outlined in July
* Changes in law final part of cajas reform
* Stress tests to show solvency of banking system
MADRID, July 6 (Reuters) - Spain's central bank expects a bill allowing savings banks to issue shares and strengthen their balance sheets to be drafted by the end of July, a senior official said on Tuesday.
Spain has overhauled its 45 savings banks -- or "cajas" -- through a wave of recent mergers to halve their number and support the weaker ones, which have been hit by the end of a property boom in which they invested heavily. Concern about the cajas' health continues to unnerve financial markets however.
"The reform is expected to be concluded this month with a proposal to modify the cajas law, which will allow them to obtain high quality funding, and table plans for a brighter future," Bank of Spain Deputy Governor Javier Ariztegui said.
"It is well known that savings banks cannot issue shares. This not only reduces their capacity to bolster capital, but limits the market's ability to discipline them," he added in a speech in the northern town of Santander.
Ariztegui also welcomed the publication of stress tests for all of Spain's listed banks and cajas, in line with results due to be published on banks across Europe on July 23.
"The publication of the stress test results, which will be especially broad in this country due to the coverage and communication efforts by the Bank of Spain, will show how solvent the Spanish banking sector is," he said in the speech, a text of which was published by the central bank.
The number of people registered as without a job in Spain fell for the third straight month in June. It was down by 2.1 percent from May. That is the sharpest monthly drop in five years and a sign of recovery in the country’s battered labour market.
Joblessness fell in almost all Spain’s major economic sectors, industry, construction and services. But overall the total was up 11.7 percent on June last year.
Spanish business reporter Francisco Garcia said: “This is an important and symbolic dip with the number falling below that rather frightening four million figure. But it is summer and tourism always has an effect on the unemployment numbers. It’s a good figure, but there no connection with the ongoing labour market reforms and this doesn’t compensate for the jobs that were destroyed last year.”
Spanish unemployment has more than doubled in the last two years after the collapse of the construction industry following the bursting of the property bubble.
Sinking consumer confidence has left Spaniards less likely to shop and eat out. In May unemployment throughout the euro zone was unchanged at 10 percent. The EU’s statistical office said just under 15.8 million people were without jobs, 35,000 more than in April. A long and steady deterioration in the labour market may be over for now but the outlook is poor as austerity programmes bite.
Output at factories, refineries and mines increased 3.3 percent in May from a year earlier, adjusted for the number of working days, after climbing a revised 2.3 percent in April, the National Statistics Institute in Madrid said today in an e- mailed statement. The number of people registering for unemployment benefits fell 83,834, or 2.1 percent, in June, the Labor Ministry said in a separate report.
Spain emerged from an almost two-year recession in the first quarter, helped by exports and as companies including Acerinox SA, the world’s largest stainless steelmaker, cranked up production. Still, an unemployment rate of 20 percent, a surge in borrowing costs and the deepest budget cuts in three decades may undermine the recovery.
Spanish minister to meet Pimco's Bill Gross over debt
Although it has yet to be confirmed whether the Spanish minister will be meeting the bond guru in person, Campa will be arriving at their headquarters following a whistle-stop tour of the US where he has already been to New York to speak to Bloomberg, Financial Times and The New York Times.
He went event further last month saying that Spain’s destiny ‘seems to increasingly depend on the willingness of the EU and the IMF to bail it out’ and added his firm did not have a single dollar worth of Spanish bonds in any of its funds.
1st July 2010
The rating's agency, the only major agency that still maintains a top rating for Spain, said it was conducting a three-month review of the country's Aaa local and foreign currency government bond ratings.
The rating agency also cited concerns over the impact of rising funding costs over the medium term.
"If at the conclusion of the review, Spain's ratings are lowered, it would most likely be by one, or at most two, notches," Moody's said.
Spain has been the target of intense speculation in sovereign debt markets as the next country in the euro zone to need European Union help after Greece, though the government has firmly denied it had any problem meeting financing obligations. Moody's senior risk analyst Kathrin Muehlbronner said the review should not be taken out of context and Spain remained a highly rated country.
"The contagion has been so dramatic in the markets in the last few months people forget really what a gulf there is between Spain and Greece ... Spain is a very highly credit worthy country," Muehlbronner said in a telephone interview with Reuters following the announcement.
"The policies that the government is now proposing to pursue should eventually reach in to the conscience of the market ... but the issue where the deficit and debt has increased and we're looking at a situation that is somewhat more difficult to unwind than it was before." Spain's had a public deficit of 11.2 percent of gross domestic product in 2009 while the debt-to-GDP ratio stands at around 55 percent, which Moody's said it expects it to rise to 80 percent of GDP by 2014.
The government announced in early June a 15 billion-euro (12.3 billion pound) savings plan to help cut the deficit to 3 percent of GDP by 2013, though the rating's agency said low growth forecasts would make this difficult.
Moody's sees Spain's average growth at 1 percent over the 2010-2014 period compared to the government's projections of around 3 percent by 2013. "Moody's believes that more fundamental adjustments to key spending items will be required in order to achieve the government's budget deficit targets," said Muehlbronner in a statement.
RISING COSTS
The cost to insure Spain's debt with credit default swaps had tightened earlier on Wednesday to 260 basis points, or $260,000 (173,948 pounds) per year to insure $10 million in debt for five years, from 273 basis points on Tuesday's close, according to Markit Intraday. Spain's 10-year bond spread against the German bund stood at around 202 basis points late on Wednesday, off a recent high of 238 bps, but well above around 80 bps in April. The euro slightly pared gains versus the dollar after the Moody's announcement.
Moody's said one of the key reasons for the review was concern over the impact of rising funding costs in the medium term as reforms of the labour market, the banking system and the pension system took time to restore investor confidence. The labour market reform is currently in parliament for review, and Muehlbronner said she hoped legislators would strengthen the bill, which aims to make hiring and firing easier and put more young people to work.
Spain suffers the highest level of unemployment in the euro zone at over 20 percent, while more than 40 percent of those under age 25 available for work are unemployed. On the banking system restructuring process, which the Bank of Spain said on Tuesday was close to completion, the analyst said she did not think the government would need to recapitalise the banks much more than had been already earmarked.
"We don't expect that there is a massive extra recapitalisation need for the banks above what the government has stated, and hopefully the stress tests that come out will help calm the markets," Muehlbronner told Reuters.
The Bank of Spain has said it will publish a stress test for the banks soon. The consolidation of Spain's mostly unlisted savings banks could cost as much as 30 billion euros, the government has said, though the current round of bank mergers has tapped the bank restructuring fund for just over 10 billion euros so far. Investor nerves have also been tested over a Spanish debt redemption hump of 16.2 billion euros by the end of July. The government claims they will not need to tap the market to meet the repayment, but there are concerns they will struggle to meet payments.
"We don't see July's redemption as being a problem," Moody's senior analyst Kristin Lindow told Reuters.
Fitch Ratings cut Spain's credit ratings to AA-plus, the second highest level, from AAA on May 28, saying its economic recovery would be more muted than a government forecast, pushing world equities and the euro lower. The downgrade followed a cut by Standard & Poor's in April.
30th June 2010
Spain calls for immediate release of bank stress tests
Spanish Finance Minister Elena Salgado called on Tuesday for the immediate release of "stress tests" aimed at proving the ability of eurozone banks to sustain financial shocks. Her comments came amid market concern over the health of Spanish banks, some of which have had trouble securing inter-bank funding recently.
"Spain wants (the tests) published as soon as possible," Salgado told Spanish radio Cadena Ser, adding that she would make such a proposal at meeting of EU finance ministers on July 13. EU leaders agreed at a summit earlier this month to release the results of the stress tests in order to calm markets nervous over the state of the financial institutions. Salgado also appealed to the European Central Bank to "be conscious of the needs of our financial system."
An article in Britain's Financial Times on Tuesday said Spanish banks were angry that the ECB is not renewing a one-year 442-billion-euro special liquidity scheme launched last year. The scheme expires on Thursday.
Spain's second-biggest bank, BBVA, declined to comment on the article.
A spokesman for its main rival, Banco Santander, said the group's president, Emilio Botin, had recently emphasised that the bank had "very comfortable" liquidity and "does not usually count on aid from the ECB."
Salgado also said that the Spanish economy would not slip back into recession this year.
"We have not changed our forecast that there will be no negative third quarter this year," she said.
Spain last month became the last of Europe's big economies to emerge from recession, with official data showing fragile growth of 0.1 percent in the first quarter.
The country went into recession at the end of 2008 as the global financial meltdown compounded a crisis in the Spanish property market, which had been a major driver for growth in the preceding years.
The recession sent the unemployment rate soaring to more than 20 percent in the first quarter.
26th June 2010
Government expects to create 2.37 million permanent jobs by the end of 2011, with the new labour reform.
The government estimates that the new labour reforms will allow for the signing of 2.37 million permanent contracts from next July to the end of 2011, as recorded in the financial report accompanying the decree-law.
In that report, the government estimates the costs of some key reform measures, which would be around 700 million euros until 2012. The main item that would cost is the payment by the Wage Guarantee Fund of eight days compensation for the dismissal of permanent contracts, whether ordinary or in promotion of employment, representing 123.6 million euros.
The subsidies for hiring unemployed persons over 45 years would cost 212.88 million (31.68 million this year, which is 101.37 million and 79.83 million in 2012). Incentives for the conversion of training, replacement or substitution of permanent contracts are estimated at 53.58 million over three years. In addition, exemption from social security contributions in training contracts would cost 80.54 million euros, according to the financial report accompanying the decree.
Thus, the extension to 180 days of the right to replacement of unemployment benefits in case of suspension followed by termination of a contract this year would cost 8.8 million, 17.4 million in 2011 and 26.2 million in 2012, i.e. a total of 52.4 million in these three years. The second step of promoting the reduction, enlargement to 80% of the subsidy for maintenance of employment of workers affected by temporary ERE will cost EUR 63.36 million
International Monetary Fund Managing Director Dominique Strauss-Kahn will meet with Spanish Prime Minister Jose Luis Rodrigo Zapatero Friday in Madrid for talks on the economy, but the Spanish government denies this is related to a Spanish bailout.
The yield spread on 10-year Spanish bonds over benchmark German bunds rose 13 basis points to 223.5 basis points after the Spanish press reported that the European Union, the International Monetary Fund and the U.S. Treasury are drawing up a liquidity plan for Spain involving a credit line of up to EUR250 billion.
Doubts about the ability of Spanish banks to borrow in capital markets is also causing some concern.
Market participants say the nation's two largest lenders, Banco Bilbao Vizcaya Argentaria SA (BBVA.MC) and Banco Santander SA (SAN.MC) appear to be in relatively good shape. But some of the smaller Spanish savings banks are performing a day-to-day survival act and are largely dependent on the European Central Bank's liquidity facility for survival, which suggests that an intervention by the IMF could well be on the cards, said UniCredit SpA analyst Stefan Kolek.
"The latest statistics show that Spanish banks drew EUR85.6 billion last month, which is twice the sum they borrowed before the Lehman collapse in 2008," he says. "The increased borrowing from the ECB reflects the liquidity needs in the Spanish banking system, and banks' lack of access to capital market funding."
Santander acquires 318 RBS branches
Spanish bank Santander, which purchased Abbey National, will acquire 318 of the Royal Bank of Scotland’s high street branches.
RBS, which is currently 84 per cent controlled by taxpayers, has the liberty to decline any offers under its asking price, but must sell the selected branches by 2013. The bank shocked the financial sector last year with the announcement of a £28bn loss, a record for the industry. After its purchases of Abbey National, Alliance & Leicester, and Bradford & Bingley, Santander will expand across the UK exponentially. The company did hint at the possibility that it may float the business in the stock market but said no decisions had been made. Santander is expecting to announce growth in the UK in the double-digits, said chairman Emilio Botin.
* Treasury to offer 3-year bonds on Thursday
* Volume of issuance expected to pick up this month
* But demand likely to be sufficient given high yields
* 16.2 billion euro bond redemption looms on July 30
* Economy Secretary says no worry over redemption
Domestic banks' demand for Spanish debt, and conceivably buying of Spanish debt in the secondary market by the European Central Bank, may ensure the success of the auctions despite waning foreign demand.
A total of 16.2 billion euros ($19.8 billion) of Spanish government bonds will mature on July 30, the only significant redemption which the country faces in the rest of this year.
To raise enough funds for the redemption, Spain will have to conduct several bond auctions, analysts calculate, starting with a sale this Thursday of a new three-year benchmark bond with a 2.5 percent coupon. The Treasury has said this sale aims to raise 3 to 4 billion euros. The auctions come at a difficult time for the Treasury. Spanish government bond yields have surged in the past three weeks because of worries about the country's ability to curb its budget deficit and implement economic reforms.
In a sign of fading appetite for Spanish debt, the 10-year yield reached 4.66 percent this week, up from 3.95 percent in mid-May and above the previous high of 4.50 percent hit before the European Union agreed on a trillion-dollar financial safety net for euro zone countries in early May. Banking sources told Reuters that some foreign banks had become reluctant to accept Spanish bonds when trading in Europe's interbank bond repo market, a major source of financing for banks.
At Spain's last three-year bond auction on April 8, demand of 5.2 billion euros far outpaced the allotment of 2.9 billion euros. Analysts said that on Thursday, demand might well not be as strong relative to supply.
"It makes sense that we'll see non-domestic support tailing off as there's been a lot of volatility recently and no one wants that on their books," said Ioannis Sokos, rate strategist at BNP Paribas in London.
Nevertheless, analysts said Spain was likely to succeed in selling as much debt as it needed to on Thursday and at other auctions over the next few weeks.
The indicative secondary market yield for Spanish government bonds with three years to maturity was 3.41 percent on Wednesday afternoon. Analysts said the Treasury was likely to accept a premium of several basis points and if absolutely necessary, a larger premium to make Thursday's sale a success.
In addition, large Spanish banks, which are believed to have ample cash and retain access to money market funding, may buy aggressively to prevent any failure of the bond sale. Spanish banks own around 40 percent of the country's debt.
"It's in nobody's interest to let this auction fail. If it did, it would have very bad consequences for primary dealers such as Spanish and French banks," said 4Cast analyst Jose Garcia Zarate.
He and others noted that on May 25, when investors were already jittery about Spain, the Treasury had no trouble selling 3 billion euros of three- and six-month Treasury bills, attracting over 7 billion euros of demand.
Also supporting Spain's debt sales are the possibility of intervention by the ECB. Since it began buying government bonds in the secondary market in early May to head off a euro zone debt crisis, the ECB has focused mainly on buying Greek debt, traders believe; but it could quickly come to Spain's rescue if the Spanish bond redemption looked in doubt.
Aside from the three-year bond sale on Thursday, Spain has scheduled 10-year and 30-year bond offers for June 17, and a series of 12-, 18-, 3- and 6-month T-bill auctions between June 15 and July 27. An analyst at a London-based investment fund, who asked not be named, calculated that Spain would have to increase bond issue volumes in the next few weeks to meet the redemption and other obligations.
It will need to raise 12 billion euros from this month's bond auctions, versus a monthly average of 8.4 billion euros between January and May, and 16 billion euros from four T-bill offers in June, versus a monthly average of 9.6 billion euros. In July, it will need to raise a further 7 billion euros, the analyst estimated.
In a telephone interview, Economy Secretary Jose Manuel Campa declined to reveal Spain's current cash position or how much more money the country would have to raise to meet the redemption. But he said the redemption would pass comfortably.
"We planned the refinancing strategy last year and it's because of this we have no concern at all whether we have the capacity for July's payment," he said. "I think the perception is the Treasury attempts to capture the funds the week before, and neither the Spanish Treasury nor any other financial entity does this. The strategy is to accumulate funds for refinancing. There's no reason for these concerns."
Despite the market’s concerns about Spain’s sovereign debt, their biggest bank is making a bullish bet. Banco Santander will spend $2.5 billion in cash to reclaim the 24.5% stake in its Mexican subsidiary it sold to Bank of America in 2003, at a time when Santander was short of capital.
Now it’s Bank of America’s turn to be short of capital. Seven years ago, its $1.6 billion purchase of the stake was part of a trend among U.S. banks that saw big profits in offering consumer banking services to Hispanic populations at home and across the border. But times have changed. Bank of America is already selling a stake in a Brazilian lender, and its exit of Mexico will help add to its capital and narrow its focus.
Considering the sale price, Bank of America gained 56% on its investment.
Santander, meanwhile, sees Mexico as a key market for growth while business at home is sluggish. "This acquisition reinforces Santander's commitment to Mexico, a country with a very positive outlook for growth, and furthers the geographic diversification of our group," Santander chairman Emilio Botin said a statement.
The cash deal is a sign Santander is confident despite the concerns among bond traders about state finances in several European economies, including Spain, Greece and Portugal. Those concerns have weighed on Santander’s stock, which is down 35% this year.
Spain's labour reform could sideline unions 
(Reuters) - Spain may make it easier for companies to bypass unions to lower workers' pay and conditions if they can prove they are in financial difficulty, El Mundo newspaper reported on Sunday, citing government sources. Companies in financial difficulty can currently only negotiate down wages and conditions to below those established by the collective bargaining procedure if they have the approval of unions, which is rarely given.
But El Mundo said one of the Socialist government's drafts of labor reform due to be handed to unions on Wednesday says independent government commissions would be created to negotiate salary cuts between workers and employers in such cases. A government spokesman declined to comment on the report.
Details of the government's reform plans have been leaking into the media, and on Friday newspapers said the latest draft includes a proposal for companies to offer only 20 days' severance pay per year worked, versus 45 days at present, if they could prove they had financial difficulties.
Economists consider labor market reforms, along with bank restructuring and deficit reduction, essential to solving Spain's economic problems. Fears of a debt crisis contagion in the euro zone after Greece's woes has piled on the pressure.
An analysis in El Mundo, which leans toward the opposition conservative Popular Party on economic policy, cited experts as saying that an overhaul of collective bargaining would have to be an element of any labor reform.
"Agreements between workers and employers must reflect the conditions at each individual place of work," El Mundo quoted Juan Iranzo, the director of Spain's Institute of Fiscal Studies as saying.
The government has said it will push long awaited labor reform through parliament unilaterally if three-way talks it is hosting with employers and unions end without success, though it has also said it is keeping the channels for communication open.
"I reiterate ... that whatever happens the government will approve the labor reform on June 16," Deputy Prime Minister Maria Teresa Fernandez de la Vega told reporters after a weekly cabinet meeting.
"Until this happens, we should be cautious and allow the talks to continue without any kind of pressure. We are still in favor of dialogue and consensus."
Spain's largest unions have called a one day strike for Tuesday to protest at government austerity measures and have said they will call a general strike if they are not happy with the coming labor reform.
This week the Spanish press have been commenting on a report by Standard and Poor’s that suggests the Spanish property market still has another 12% correction before the market is at fair value. This report is only as good as the figures used to calculate it, and there is some question over the 12% figure. However overall, there is a general consensus that the correction in house prices still has some way to go, but fortunately maybe nearer the end than the beginning.
S&P says that in August 2005, it warned that a red-hot Spanish housing market was growing at an unsustainable pace. It also cautioned that a slowdown was desirable in order to avoid a major collapse later on. That slowdown did not materialize in the following 18 months. But data released by INE, the Spanish statistical office, on March 26, 2008, strongly suggest that the market had now taken a dramatic turn. In the 12 months to January, completed house sales were down a staggering 27% on the previous 12 months. Sales of second-hand dwellings, representing 52% of total sales, fell 36% over the same period, while sales of new houses were down 15%. Not surprisingly, total lending to home buyers fell 28% over the period. The report notes that the average interest rate charged by savings banks was 5.09% in January 2008, up from 4.12% a year earlier, while the average term was 26 years (unchanged). Moreover, borrowers continued to show a very strong preference for variable-rate loans (98.3% of total loans, up from 97.6% a year earlier).
S&P says that the biggest concern at this point is the lag between housing starts and the most recent trends in the market, as reflected by house price inflation and the number of actual sales. The average number of housing starts in Spain over recent years totals 700,000 per year. Yet the population has only been rising by about 600,000 per year. Even allowing for some catch-up earlier this decade, the supply of dwellings has clearly outpaced demand (and obviously not every new addition to the total population requires a new home). Furthermore, U.N. projections indicate a slowdown in population growth in coming years, to about 500,000 per year.
The Spanish government has announced austerity measures to bring its public debt and deficit into line. On Friday after European markets closed, ratings agency Fitch said those measures would damage Spanish growth prospects. The country's credit rating was downgraded.
On the surface, Spain's debt levels don't look as scary as those in Greece. Spain's debt-to-GDP ratio is 53% with a deficit-to-GDP ratio of 11.2%. Both measures are higher in Greece. But Spain's economy is much larger, about $1.4 trillion in GDP. And there are two big other problems, both of which stem from the nature of Spain's credit boom.
The first is that the unemployment rate is already 20% in Spain. The real estate boom supported heavy building and construction investment along with lots of employment. Much of that is going away. According to the Associated Press, the total number of unemployed in Spain leapt from 1.7 million in the first quarter of 2007 to 4.6 million in the first quarter of 2010. Needless to say, it's hard to contribute to economic growth when you can't find a job.
But the bigger problem is the collateral of the banking system. Granted, this is not just a Spanish problem. But Spain's 45 big savings banks are chock full of housing-backed collateral. Spanish house prices were the asset class that benefitted most in the credit boom. And now, that bank collateral is under pressure, which puts a government with comparatively modest levels of debt under even more pressure.
Mind you this is not an example of contagion. The debt disease is everywhere, from Europe to America to Japan. Sooner or later, its symptoms - deleveraging, lower household spending, falling asset prices - start to show up. They show up when the cost of servicing existing debt becomes unbearable and the prospect of borrowing even more can only be realised by debt monetisation (the central bank buying government bonds).
This is the big underlying story to Europe's woes. "How long will the capital markets continue to finance government borrowings that may be refinanced but never repaid on reasonable terms? And second, to what extent can obligations that are not financed through traditional fiscal means be satisfied through central bank monetization of debts - that is, by the printing of money?"
One view is that you'll see more asset deflation (falling house and stock prices) until the government (in various countries) is compelled to support banks and households by buying assets with new money. But over what time frame this all plays out is another matter.
Eurozone banks face £165bn in toxic loan losses
The European Central Bank warned today that eurozone banks face a "second wave" of up to €195bn (£165bn) in potential loan losses this year and next and that the financial sector is facing "hazardous contagion" from the sovereign debt crisis. The ECB said eurozone banks would need to make provisions for further losses this year of €90bn, and €105bn in 2011, on top of some €238bn in bad debts written off by the end of 2009.
"We are experiencing now a second wave of writedowns, which relate to the performance of loans," ECB vice president Lucas Papademos said. "This is not unexpected. Although writedowns on loans will decline, they will continue, simply reflecting the overall performance of the economy. The overall resilience (of the financial sector) has increased, taking into account that capital buffers have been strengthened," he added. "But, at the same time, we are aware of the challenges ahead, particular with respect to public finances."
The ECB in its Financial Stability Review also disclosed it had increased its purchases of eurozone government bonds, and has now settled €35bn. European stock markets had remained calm, as the Spanish government promised tough action on labour reform in the wake of last week's downgrade of its credit score. Analysts had feared fresh turmoil when Fitch cut Spain's debt rating by one notch to AA-plus after European markets closed on Friday, hitting Wall Street. The FTSEurofirst 300 index of top European shares closed up 0.3% at 1,000.55 points, albeit bringing the curtain down on its worst month since February 2009. The index lost 5.8% in May amid fears the problems in the eurozone could derail the global economic recovery. The UK and US markets were closed for holiday.
Spanish finance minster Elena Salgado promised to push through reform of the country's strict labour laws this month: "The period to reach a pact on the labour market reform is coming to an end and if these talks do not produce the desired results, the government will still begin these reforms ... before the end of June."
Spanish unions have threatened to call a general strike over changes to rigid labour laws which economists regard as a barrier to job creation, exacerbating an unemployment rate which has hit 20% and is the highest in the 16-nation eurozone. Zapatero's cause was boosted by praise from Dominique Strauss-Kahn, the International Monetary Fund's managing director, who backed Spain's austerity budget package which just made it through parliament last week – although he made clear more needed to be done.
"The measures the (Spanish) government has been taking are strong and should help recover confidence in the future," said Strauss-Kahn. "The issue now is to see how the measures will be implemented, especially those concerning the labour market." Spain's €15bn (£12.7bn) austerity plan made it through parliament by just one vote last Thursday, prompting speculation that Zapatero may be forced to call an early election if his 2011 budget proposal, due in September, is rejected.
Just Friday, Fitch cut Spain's credit rating by one notch, sending markets lower and capping a horrible week for a government struggling to convince investors that it can solve its economic woes and avoid a Greek-style debt crisis. Fitch Ratings linked the downgrade to the record levels of household and corporate debt in Spain, as well as mounting public debt, which it said would act as a drag on economic growth.
World equities slid and the euro fell below $1.23 after the downgrade, stoking fears that Spain, the eurozone's fourth-largest economy, could suffer a crisis similar to the one that forced Greece to agree a 110-billion-euro rescue with the EU and IMF earlier this month.
Because the Spanish economy is far bigger than Greece's, a crisis there would have far more serious implications for the eurozone and global growth. "Spain is the 800-pound gorilla in the room," said Win Thin, a senior currency strategist at Brown Brothers Harriman in New York. Fitch is the second agency to cut its rating on Spain after Standard &Poor's downgraded the country last month. In addition to the debt woes, Fitch cited the inflexibility of the labor market and the cost of restructuring Spain's network of unlisted savings banks.
Bloomberg reports that Spanish lenders have foreclosed upon property worth nearly €60 billion, which means that very soon Spanish banks, which as we pointed out earlier are already suffering a liquidity crunch as a result of loss of access to Commercial Paper, will have to take an incremental up to €18 billion in asset write-downs, a development which will have a major adverse impact on Spain's banking sector once it funnels through the banking system, and especially once the need for liquidity spikes yet none is found.
The Bank of Spain removed the managers of CajaSur, a savings bank crippled by property loan defaults, and put the bank under a provisional administrator.
The lender, based in the city of Cordoba, Spain, and controlled by the Roman Catholic Church, will be controlled by the government’s bank restructuring fund, the regulator said today in an e-mailed statement.
Spain’s worst recession in 60 years has driven up defaults at the country’s banks, which have made loans worth 454 billion euros ($570 billion) to finance construction and activities related to real estate. Banks have until the end of June to seek aid from a government fund of up to 99 billion euros set up last year as the regulator seeks to hasten mergers between ailing lenders to ease over-capacity and help them recapitalize.
“The Bank of Spain has shown it’s prepared to take action to resolve the situation at CajaSur and that’s positive,” Alberto Espelosin, who helps manage about $12 billion at Ibercaja Gestion in Zaragoza.
- "The downgrade primarily reflects Standard & Poor's downward revision of its medium-term macroeconomic projections. "We now believe that the Spanish economy's shift away from credit-fuelled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed."
- We continue to believe that the 2010 fiscal deficit will be broadly in line with the government's target of 9.8% of GDP. However, over the medium term we anticipate weaker revenue performance and higher spending pressures than what
the government envisages, mainly due to our view of more subdued economic growth compared with the government's current estimates. As a result, Standard & Poor's projects that the general government deficit is likely to still exceed 5% of GDP by 2013, significantly higher than the government's official target of 3%. Consequently, we estimate that gross government debt is likely
to rise above 85% of GDP in 2013 and continue to trend higher until the middle of the decade.
- At the same time, the 'A-1+' short-term sovereign credit rating was affirmed.
- Follow Up: S&P downgrades City of Barcelona to AA; Outlook Negative