It was an all round horrible night for Spain, starting with a bond auction that went a little wrong:
Spain’s government just sold a bunch of short-term debt this morning. But, demand was way down and borrowing costs were much higher than in an auction for similar debt a month ago.
2-year bonds sold for 5.3%, up from 4.48% last month. 5-year bonds sold for 6.54%, up from 6.19% last month. 7-year bonds sold fo 6.798%, up from 6.19% last month.
After the auction, the Spanish 10 year bond shot up above 7% where it stayed. Although, as I mentioned last week, my expectations are for the Spanish economy to get even worse over the coming year, so higher yields are likely, this particular auction probably wasn’t helped by some pre-bailout vote rhetoric from the Germans:
German deputy finance minister Steffen Kampeter on Thursday reiterated that the Spanish state is liable for the 100 billion euros ($123 billion) in aid that other euro zone countries are injecting into the country’s ailing banking sector and that the aid does not amount to a blank check.
“There is no direct infusion into the Spanish banking system. The European partners have a memorandum of understanding with the state of Spain and money is delivered to the state of Spain and guaranteed by the state,”
Wolfgang Schauble repeated those words in his address to the Bundestag last night. So this just re-affirms my analysis of both the MoU and Eurogroup statement that for all the fanfare this is little more than a standard European bailout with all the usual strings attached.
The master financial assistance facility documentation ( available below – page 70 ) was contained in the reference material given to members of the Bundestag before last night’s vote on the matter. The document gives details of how the facility will function:
To utilise the EFSF Debt Securities received under the Bank Recapitalisation Facility only for the purpose of financing the recapitalisation of financial institutions in Spain by providing financing to FROB to subscribe Bank Capital Instruments issued by the financial institutions specified in the MoU in accordance with this Agreement and the MoU and not to sell, transfer, grant security over or otherwise deal with these EFSF Debt Securities other than in accordance with this Agreement and the MoU provided that prior to funds being disbursed to FROB or contributed to FROB by the Beneficiary Member State, EFSF shall have confirmed that it is satisfied in relation to the legal instruments and documentation between the Beneficiary Member State and FROB setting out the legal basis of such contribution of funds to FROB by the Beneficiary Member State;
And in case you were still in any doubt about who is on the hook if this deal doesn’t go according to plan:
Without prejudice to the terms of Clause 9, if the Beneficiary Member State fails to pay any sum payable under a Facility on its due date, the Beneficiary Member State shall pay in addition default interest on such sum (or, as the case may be, the amount thereof for the time being due and unpaid) to EFSF from the due date to the date of actual payment in full, calculated by reference to successive interest periods (each of such length as EFSF may from time to time select, the first period beginning on the relevant due date and, wherever possible, the length of such period shall be that of one week) at a rate per annum on such overdue amount which is equal to the rate which is 200 basis points per annum over the higher of (a) the EURIBOR rate applicable to the relevant period selected by EFSF and (b) the Interest Rate which would have been payable if the overdue amount had, during the period of non-payment, constituted Financial Assistance under the relevant Facility (if any). So long as the failure to pay continues, such rate shall be refixed in accordance with the provisions of this Clause 6(3) on the last day of each such interest period and unpaid interest under this Clause concerning previous interest periods shall be added to the amount of interest due at the end of each such interest period. The default interest is immediately due and payable.
The Beneficiary Member State shall reimburse all costs, expenses, fees and Loss of Interest incurred and payable by EFSF as a consequence of an early repayment of any Financial Assistance under this Clause at the times and in the manner set out in this Agreement or the applicable Facility Specific Terms. In addition, the Beneficiary Member State shall pay default interest, as provided in Clause 6(3) above, which shall accrue as from the date when the outstanding principal amount in respect of such Financial Assistance has been declared immediately due and payable, until the date of actual payment in full.
We affirm that it is imperative to break the vicious circle between banks and sovereigns
It was also a busy night for voting. Aside from the German parliament, that voted and approved the terms of the Spanish bailout, the Italian parliament also approved the ESM and fiscal compact. Meanwhile in Spain Mariano Rajoy pushed through his austerity package as thousands of people took to the streets in protest:
Tens of thousands of public employees, trade union members and other Spaniards are marching in 80 Spanish cities to protest the latest batch of austerity measures approved by the government.
The ruling conservative Popular Party used its majority in parliament to push through the measures on Thursday. They include a rise in sales taxes and a wage cut for civil servants.
As dusk fell, marchers in Madrid carried Spanish flags bearing black bows for mourning and banners saying, “No to the cuts” and “You have ruined us”.
Late Thursday, the government also published details of the $122.9bn financial assistance agreement between Spain and the Eurogroup aimed at shoring up the country’s struggling banks.