Jawboning Spain

The ECB’s OMT is beginning to have an interesting effect on the what is happening in Europe, particularly Spain. Spain has already requested a €100bn line of credit for its banking system, but a I have mentioned previously this is nowhere near the end of it. It is now expected that the country will need to seek a full bailout with one of the European stability programs which will also trigger the support from the ECB. The stability program will, however, come with strict conditionality and there certainly appears to be resistance on behalf of the Spanish government to make the request.

So now we are in a policy limbo. The ECB’s program is approved and ready to go (to the increasing shrills of Jens Wiedmann), so in terms of the markets it is “in play”, yet the Spanish government doesn’t appear to be in any rush to use it. This has created a rather interesting dynamic because just by existing the OMT is bringing down Spanish yields which in turn is making the Spanish government’s insistence that it doesn’t yet need a bailout stronger.

On Tuesday ECB member Luc Coene warned the Spanish PM, Mariano Rajoy, against delaying the use of the assistance program claiming that it wouldn’t take long for Spanish yields to once again rise. I suspect this will be the case in the medium term, but overnight Spain managed to sell €3.56bn of 12-month debt at average yields of 2.835%, down from 3.07%, and €1.02bn of 18-month paper at average rates of 3.072%, down from 3.335%. The auction was well covered at 1.9.

So the OMT’s umbrella is currently doing the opposite of what Mr Coene claims, and in the meantime Spanish Deputy PM, Soraya Saenz de Santamaria, has re-stated that his government was still considering the terms of a European bailout and hadn’t yet made any decisions. This hesitation was also supported by Spanish business who again appeared to be in no rush:

The CEOE (Spanish Confederation of Business Organizations) today recommended the government “do not rush” in the decision on a bailout of the debt. The management has also expressed hope that both Madrid and the rest of capital “wisely used the time won” with an unlimited supply of bond purchases by the ECB. And he warned that some of the risk premium only be removed “if Spain does his homework.”

The recommendation has studied in Brussels Deputy Secretary General of the CEOE, Alberto Nadal, during a press briefing prior to his attendance at a meeting of the Economic and Social Committee.Nadal has described the offer of intervention by the ECB President Mario Draghi, as “the beginning of the solution, no doubt.” But he added that a mechanism is “subject to a complex political process,” which requires tripartite negotiations with the ECB, the Eurogroup (council of finance ministers of the euro area) and perhaps even International Monetary Fund.

Deputy Secretary of the CEOE considers that “the mere existence of this instrument has earned time.”And although considered essential a reduction of risk premium to facilitate corporate financing, Nadal has called prudence. “Rushing would be worse,” said at the headquarters of the CEOE in the EU capital

Last week the Spanish Economics Minister, Luis de Guindos, announced his government would release another round of ‘growth focussed’ reforms along with the country’s budget on the 28th of September, but it is difficult to see these as anything more than politicking in the lead up to an official request.

There is no doubt that the real economy of Spain continues to deteriorate.  With 1 in 4 people of working age unemployed , forward indicators suggesting worse is yet to come and the government increasing taxation in the face of falling revenue it really is just a matter of time before external help is required. Overnight the spanish central bank released the latest figures on bad debts in the banking system and the numbers are the worse in over 50 years:

The value of bad debts held by Spain’s banks in July rose to 169.3bn euros ($221bn; £136bn), according to latest figures from the central bank.

The Bank of Spain said 9.9% of banks’ total loans were in arrears, up from 9.4% a month before.It was the highest bad loan ratio since the central bank began compiling the data in 1962.

A brief look at the underlying data ( below ) shows that the rise in bad debts is happening as households deleverage.

It is rumoured that Spain will officially request a bailout in early October so that a decision can be ratified at the next EU summit. This, however, may be dependent on how much support the ECB’s “whatever it takes” tool can give the country even while still in its holster. I expect jawboning from both sides to continue.

Spanish Loan Data

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  1. Well, like Greece before it, Spain needs to bring its acts together and carry out necessary reforms. Granted, it would be politically difficut, but what else can they do?

    In democracy, politicians know exactly what needs to be done, but they do not know how to get re-elected afterward. And here is the rub; if the voters of an electrolate are not smart enough to re-elect politicians who implement necessary changes, then the voters probably do not deserve to have a decent economy after all.

    • Spanish unemployment is circa 24% and youth unemployment is about 52%.

      The ‘necessary reforms’ may be running counter to enough national unity for any government to manage, as well as counter to enough national unity to keep the show on the road.

      Dont get me wrong, I am fully aware that they have major issues, I am just saying that at soe point actually keep their society/country together is a major issue, and at the unemployment rates they have that couldnt be that far away.

      • Austerity right now probably would not help.

        The common mistake among all these countries that find themselves in trouble now is that they did not tighten their belts when things were good. It is far better to tighten in good times and avoid austerity in tough times.

        But then again, if people were smart enough to figure that out then we would not have had the GFC in the first place. So austerity is inevitable, rightly or wrongly.

  2. What is the real reason Rajoy hasn’t called Draghi for a bailout? The conditionality? If the market yields are down and stay down like this, that conditionality must be a cause?

    • As is, Spain’s economy is down the tubes.. imagine what will be the situation if all the new conditionalities are imposed.

      My guess is the yield will go up again when(not if, when) there is more bad news re Spain’s economy/ budget deficit.

  3. Weidman should have just done everyone a favour and quit the other week when he threatened to. The guy is too young and imature (who threatens to quit when they dont get their own way then doesnt go through with it?) to hold his post and clearly doesnt understand a. the nature of the EU debt crisis or b. the role of the ECB in such a crisis.

  4. The Spanish government is asking for 100 billion Euro to bail out the bank, to be paid for by imposing even more austerity on the general population. Even if you believe austerity is necessary, why should the banks be bailed out at all?

    Iceland let their banks go bust, and they’re well on a path to recovery. Ireland decided to bail out their banks and increased the government debt massively(50% of GNP!!), and they’ve suffered ever since. Whose interest are the politicians looking after?