Latest news - April 2013
Spain’s risk premium on 22/4 fell below 300 basis points for the first time since February 2012, while the Treasury managed to sell three-month bills at the lowest yield on record as market conditions improved considerably.

One of the detonators of the improvement seems to be a shift in attitude on the part of the European Commission away from its obsession with austerity. EC President José Manuel Barroso on Monday said: "While I think this [austerity] policy is fundamentally right, I think it has reached its limits."

With the euro zone in recession, expectations have also been building for a rate cut by the European Central Bank (ECB) at next week’s monetary policy meeting.

Expectations that the European Commission will give Spain two more years to bring its deficit back within the EU ceiling of three percent of GDP have also boosted sentiment toward the country.

In late afternoon trade, the yield on the Spanish benchmark 10-year government bond was at 4.247 percent, the first time it has dropped below 4.3 percent since November 2010. That helped push the risk premium to just below 300 basis points. Improved sentiment was also reflected in the stock markets. The Spanish blue-chip Ibex 35 index was up 2.8 percent by late afternoon.

The debt-management arm of the Economy Ministry sold 855 million euros in three-month bills at a cut-off rate of 0.150 percent, well down on the 0.340 percent offered at the previous tender of debt with the same maturity held on March 19. Tuesday’s sale saw the lowest rate paid for three-month bills since they were first issued in 1991. Demand amounted to 3.212 billion euros.

The Treasury placed a further 2.156 billion euros in nine-month bills at a marginal rate of 0.825 percent, down from 1.060 percent in March. The bid-to-cover ratio was 2.37 times the amount sold. The total sold in the two tranches of the auction was 3.01 billion, slightly above the target of three billion.
 
 
Amid pressure from the IMF and faced with the fact that output in the euro zone as a whole is shrinking, the European Commission seems to be relaxing its focus on austerity and is moving increasingly toward the idea that Spain should be given two more years to bring its public deficit back within the European ceiling of three percent of GDP.

Setting the tone for this shift in emphasis, EC President José Manuel Barroso on Monday said: "While I think this [austerity] policy is fundamentally right, I think it has reached its limits."

Barroso was speaking as the EU's statistics office Eurostat unveiled data showing that Spain posted the biggest public deficit last year within the European Union, at 10.6 percent of GDP — a result of the EU bailout to clean up its banks.

The task of taming the shortfall has been exacerbated by the ongoing recession, which the government on Monday acknowledged could be up to three times deeper than it initially forecast. Spain is currently due to bring the deficit back within the EU ceiling by 2014, when the economy is expected to return to modest growth. The second-biggest public deficit in the EU was posted by Greece at 10 percent, followed by Ireland (7.6 percent) and Portugal (6.4 percent). Germany posted a surplus of 0.2 percent of GDP.

Without counting the bailout the shortfall in Spain's accounts dropped from 9.4 percent in 2011 to 7.0 percent of GDP last year when the government had targeted a figure of 6.3 percent.

The target for the deficit for this year agreed with Brussels is 4.5 percent of GDP, with the government committed to bringing the shortfall back within the EU ceiling of three percent of GDP in 2014. Brussels' final decision on how much slack to give Spain in meeting its deficit targets will depend on its assessment of the government's new macroeconomic scenario for the next three years and the new batch of reforms that are expected to be unveiled this Friday.

In an interview with the Wall Street Journal published Monday, Economy Minister Luis de Guindos said the contraction in the economy for this year is expected to be revised to between 1.0 and 1.5 percent from an initial estimate of 0.5 percent. That would bring the figure closer in line with that of other experts. The IMF last week said it expects Spain's GDP to shrink by 1.6 percent this year before growing 0.7 percent the following year. De Guindos said he expects "slight" growth in 2014.

 
 
 
Spain is to overhaul its banking sector after Bankia, Spain’s second largest savings bank, will receive a further €17.9bn on top of the emergency €23.5bn of state-aid pumped into the entity earlier this year to stave off its collapse.

Bankia, whose shares were suspended from trading on Wednesday by regulators, said that it would cut 6,000 jobs, or around 28pc of its staff, by 2015 as it tried to stem losses. The bank said it intended to return to profit in 2013, but warned that it expected to report a loss of €19bn this year. Bankia will also close 1,100 branches as part of the restructuring.

Earlier, the European Commission approved restructuring plans for four of Spain’s nationalised banks, authorising a cash injection of almost €40bn (£32bn) from a fund secured by Eurozone partners.

The European Commission said the restructuring of the banks "will allow them to become viable in the long-term without continued state support" while the plans contain provisions to limit the distortions to competition.

The four stricken banks - Bankia, Novagalicia Banco, Catalunya Banc and Banco de Valencia - will receive combined recapitalisation of €36.9bn from a €100bn emergency fund secured by eurozone partners in June.

What might a bailout look like for Spain ?
Events are moving fast in Spain. After denials from Spanish government officials in recent months about the need for a bail-out, external assistance now seems inevitable with EU officials reported to be weighing up some form of package for Spain. We consider what a bail-out might look like. In terms of bail-out arithmetic, the obvious starting point is an assessment of the costs involved in recapitalising the Spanish banking sector. Analyst estimates range from around €30bn at the lower end up to around €150bn. The actual sum required should become clearer once results of an independent auditors’ assessment of the banks are known in a few months time. But given the severity and duration of Spain’s property market collapse, a figure in the top half of this €30bn-€150bn range seems likely.

In terms of structure, a rescue package in Spain could at least partly resemble other bail-out countries such as Ireland (who also appointed auditors to assess the extent of ‘bad’ loans in its banking sector). A bail-out of Spain might therefore feature funds being ‘split’ for immediate bank re-capitalisation purposes and for a contingency fund to cover further impairments on loan books.

On balance, analysts think a larger bail-out – extending beyond Spain’s banking sector to assist with the government’s day-to-day running costs – is unlikely. This would be consistent with the idea that Spain’s relatively low government debt-to-GDP ratio (see Chart 1) implies that debt sustainability should be a less troublesome issue in Spain compared with other countries in an environment of high sovereign borrowing costs. Indeed, latest indications are that EU officials are preparing the ground for a bail-out package which does concentrate primarily on the banking sector. Confining a bail-out to the banking sector would also leave EU officials with more ‘firepower’ for future bail-outs, if they become necessary.

Still, the possibility of a bail-out stretching beyond the banking sector should at least be recognised. To minimise the chances of a second bail-out (see European Economics Update, ‘Can a bail-out solve Spain’s problems?’, 30th May), additional funds could be considered to pre-empt any lingering concerns in financial markets about debt sustainability should a banking sector bail-out alone prove less effective than hoped in lowering Spanish bond yields. This might occur if the size of a banking sector bail-out was subsequently deemed by markets to be insufficient. The recent behaviour of Spanish bond yields suggests this should not be problematic – although time will tell. Ten-year yields have fallen by around 45bp over the past few days, most likely in anticipation of a bail-out (see Chart 2).
Finally, if recent reports are to be believed, the bail-out programme currently being considered by EU officials will feature only a limited form of ‘conditionality’ for Spain’s government. This acknowledges that a further dose of fiscal austerity could be self-defeating for Spain. But it also recognises the effort made already by Spain in terms of both fiscal consolidation measures and also structural reforms to boost competitiveness and longer-term growth prospects – recognition that has not generally been given by bond markets over the past year or so.
 

 
Spain Financial News May 2012
The Continued Pain in Spain - Time to invest ?
30th May 2012

It was another dark day for Spain on Tuesday as the IBEX 35 equity index shed 1-2%, bringing its cumulative decline since the start of the year to more than a quarter. The trigger was yet another poor performance from the banking sector, while Repsol also fell sharply following the announcement of a planned reduction in the company’s dividend payout ratio.

Although Spain’s stock market is now attractively valued from a historical perspective, as well as relative to most of its euro-zone peers (see Chart below), analysts are sceptical it will bounce back soon while concerns continue to mount about the extent of the exposure of the country’s banks to the beleaguered property sector and the future of the euro-zone more generally.


The analysts central view assumes that euro-zone policymakers will pull out all the stops to prevent large economies like Spain from leaving EMU, whatever happens to Greece. Ultimately, we could see bigger bail-out funds, common euro-zone bond issuance, pan euro-zone guarantees on bank deposits and a more radical approach to bond buying from the ECB. But while some of these steps would undoubtedly ease the pain in Spain, they would probably be reactions to a deteriorating situation. And outside financial assistance for the country – which is looking increasingly possible – would probably come with a prescribed dose of additional austerity, even if the pill were made easier to swallow than it has been for others in the past.

Crucially, the pain in Spain would also not be alleviated by a new, more competitive currency as long as she remained in the euro-zone. Granted, we expect the euro itself to fall further this year (to $1.10). But any boost to the economy and stock market in Spain might not last long if investors begin to factor in the risk of a stronger euro-zone in the future without Greece.

 
Spain nationalises Bankia
10th May 2012

The forced rescue was ordered by the premier Rajoy after auditors Deloitte refused to sign off the bank's books, amid allegations of 3.5 billion euros of inflated assets. Half of the bank's 37 billion euro of property exposure is deemed "problematic" by regulators.

The lender has asked for 4.5 billion euros in loans, converting the cash into ordinary shares. The Spanish government would hold 45% of the bank in return. Bankia has also ben asked to dispose of assets as part of the rescue, by Bank of Spain. Bank shares plunged on plans by regulators to demand a further 37 billion euros in provisions against property loans, on top of the 54 billion euros already required. A string of banks now risk nationalisation.
 
 
European Economics Update - Spain banking on a bailout ?
1st May 2012
 
1. A fragile banking sector is one factor threatening to put further upward pressure on Spanish government bond yields. And with the economy back in recession and labour market conditions continuing to deteriorate, the chances that Spain will require an EU/IMF bail-out are high and rising.

2. As recently as mid-April, the European Commission suggested that Spain would not need such a bailout to recapitalise its banks or support government operations. But it is becoming increasingly difficult to be confident about this.

3. Unlike Portugal, Spain’s economic woes have centred on its banking sector and the housing market downturn following the credit boom. So one issue relevant for a possible bail-out is the extent to which the ‘bad’ loans of Spanish banks increase further. Thus far, the government has requested its banks put aside around €50bn in provisions against losses on property loans. But that was back in January. Since then, the Spanish economy has entered recession, overall confidence has weakened and the unemployment rate – at almost 25% of the workforce – has risen further. (see Chart 1.) So €50bn in provisions may be insufficient. In short, Spain’s banks may need to raise even more capital.

4. If so, a difficult task becomes even more difficult. Some banks are aiming to set aside required provisions from retained earnings. But against such a weak economic backdrop, it is unclear that all banks would be in a position to do so (even if they are benefiting from cheap funding through the ECB’s long-term refinancing operations). Nor is it obvious that raising funds in the capital markets would be an automatic success. After all, many Spanish banks already need to boost their ‘core’ Tier One capital ratios by end-June as part of the EBA’s stress test exercise. And the timing of recent downgrades of eleven Spanish banks by S&P after the sovereign downgrade on 26th April is clearly unhelpful.

5. So whether or not Spain needs an EU/IMF bail-out could therefore hinge on the ability of its
government to provide help. Realistically, it may not be able to do so – or at least not for very long. The request for banks to set aside provisions in the first place was no accident. Spain is in the grips of fiscal austerity and arguably, the only reason that debt servicing costs are not much higher is that Spanish banks themselves are buying domestic government bonds. Recent ECB data show that Spanish banks have purchased more than €80bn worth of bonds over the past four months. (see Chart 2.)

6. At one level, the Spanish Government should be credited with implementing a series of tough fiscal consolidation plans, most recently a €27bn budget tightening package followed by a further €10bn of spending cuts. But problems in communicating its intentions to the financial markets mean that Spain may not reap the benefits. Back in March Prime Minister Rajoy announced that this year’s budget deficit target would be missed by a wide margin, calling its commitment to fiscal consolidation into question. And more recently, the idea of a ‘bad bank’ to segregate non-performing property loans appears to have been re-visited despite denials from Economy Minister, Luis de Guindos, as recently as late April. In the meantime, the prospect of a bail-out edges closer.
 
 
 
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  4. Government of Spain
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