Guest post by Peter Tchir.
Full of Sound and Fury, Signifying Nothing
It feels so long ago that we woke up to so many stories about Europe pushing risk around (it was less than 2 weeks ago). Spain is allegedly in talks to get the bailout. ESM is on track to launch in October and Greece may get some government help. I’d like to get excited, but I just can’t.
I find the attitude in Spain particularly troubling. The last minute solutions forced upon by market weakness, followed by interminable delays, is just not working. It may be helping the stock market but it isn’t helping the economy.
This summer, when everyone was talking about Euro 2012 – the soccer tournament, not the collapse, the Spanish government got a deal to recapitalize the banks. Rajoy promptly got on a plane and went to watch the football. Here we are, 3 months later (or is it 4), and nothing has been done. In theory, Bankia was supposed to get money in July. It didn’t. There is at least 1 MOU, 2 Committees, and 10 new acronyms, but no actual money. In the meantime, Spanish banks continue to bleed deposits on a daily basis.
The situation in Greece is would be comical if it wasn’t so bad. Every round of new lending is delayed. The ECB and EU insist on getting paid when anyone with even half a brain can see that the debt burden is not sustainable. Rather than the extend the maturity on the loans made so far, drop the coupon, or even reduce the notional, the Troika has done nothing. Eventually they will do something because Greece and the Euro are in no position for a Grexit, but by the time they do, Greece will have gone through at least 6 months of economic woe while the politicians bicker. Neo Nazi parties have gained popularity, in no small part because of this futile attempt to pretend that the “bailout” was anything other than secured lending that Greece couldn’t handle. And maybe I’m the only one who remembers, but the banks were supposed to be recapitalized in March, after PSI, what happened with that?
The Trader has written extensively with regards to the Spanish economic disaster. Here is a must read piece by Golem XIV.
I thought it might be a good moment to take a broad look at Spain’s financial troubles and outlook. For those of you who tire of details, the executive summary is that is that it is bad and without a doubt going to get considerably worse over the next 6 – 18 months despite Spanish government and EU claims to the contrary.
On Friday (31st Aug) the Spanish Government passed what it said would be Spain’s definitive banking reform. This is actually the third such ‘definitive’ reform. The previous two were more blather than action. All the talk in this reform centres around the creation of a so called ‘bad bank’. Which, it is being claimed, will sort Spain’s ailing banking system once and for all. This despite the fact that Spain already has a bad bank, a really bad one, Bankia. I say this only half in jest. I’ll come back to Bankia in a moment.
First let’s deal with what a bad bank actually is and does.
With the Spanish bank bail out “behind” us, some of the elite rulers are next. From NYT on the Spanish banking crisis moving to court. To be continued….
On Wednesday, a Spanish national court judge ordered Rodrigo Rato, a political ally of Spain’s prime minister and former head of the International Monetary Fund, to appear in court to face criminal fraud accusations over his recent stewardship of the giant mortgage lender Bankia.
Bankia, which the government seized in early May, is at the center of the financial storm that has led Spain to seek a European bailout of its banks. But several other Spanish banks are also embroiled in court cases, brought by politicians, shareholders and prosecutors, as well as the government’s own bank overhaul agency.
The Trader has covered the subject of the Great Spanish Denial over the past year. With the crisis and austerity hitting the Iberian Peninsula, we can’t but wonder what the “Elite” has been doing while the SPanish economy has totally imploded? More from NYT.
As Spain edged closer to a real estate and banking crisis that led to its recent bank bailout, Spanish financial leaders in influential positions mostly played down concerns that something might go terribly wrongFrom left, José Viñals of the International Monetary Fund; Jaime Caruana, chief executive of the Bank for International Settlements; and Rodrigo Rato, until last month the head of Bankia.
The optimism of Spanish central bankers who went on to top jobs at the International Monetary Fundechoes the attitudes of officials in the United States who misjudged the force of a housing collapse several years ago that crippled banks and the economy. And it underscores the complications that can arise when government officials take watchdog roles at international agencies that pass judgment on the policies they once directed.
They tell us; “it is all fine, we don’t need more capital”. Then suddenly, in matter of short time, they come back and ask us for more money. The latest of banks first telling us all was fine, and then asking for help, is Spanish Bankia. From Golem.
Some time ago in the Propaganda War series (Markets don’t Fail, Risk Weighted Lies, Balance Sheet Instabilities, Toxic Bloom of Lies and The Banker’s Mexican Standoff ), I questioned the system of jargon which banks and their regulators use to assure us, and perhaps themselves as well, about the risks they run, and their claims of having it all under control. I suggested that the concepts, for all their pretensions to mathematical precision, were dangerously stupid and actually little more than self-serving piffle.
In Toxic Bloom of Lies, I looked in particular at the technical sounding notion of Risk Weighted Assets. A bank’s Risk Weighted Assets are just the amount the bank expects to make back on the loans it has given out, multiplied by some estimate of the risk that some or all of the income from the loan might not be paid back. Not that complicated really but essential if you want to really know how solid a bank is. Of course the obvious question is who gets to set the risk factor?
Some reads regrding Spain, Bankia and the future of the Euro.
Let’s not feel sorry for Bankia’s director leaving with 13.8 million Euros. That should be enough for a small casa by sea.
Rajoy inherited Zapatero’s mess, but what is Rajoy’s plan to save Spain from the abyss? The day to day job seems to be concentrated around bringing the risk premium down, providing promises with regards to the banking sector, bringing down unemployment and much more. The real problem is,all of the above are actually going the totally opposite direction. Risk premium is spiking higher, the arguments “our banks are fine” are breached s few days later (Bankia needs more…) and the unemployment is breaking further into uncharted territory. Rajoy is trapped in a vicious circle, as the Spaniards are starting to lose their temper. From El Pais.
If there was ever a plan, there’s no trace of it left. All of the government’s forecasts have come up short. Just a few weeks ago Prime Minister Mariano Rajoy, of the Popular Party (PP), was promising that there would be no public money for the banks. But Bankia alone will now be receiving 23.5 billion euros in public funding to save it from disaster. That’s after Economy Minister Luis de Guindos said on Monday that the amount would be no more than seven billion. On Friday, Deputy Prime Minister Soraya Sáenz de Santamaría was calling it a loan. On Saturday, Bankia’s new chairman, José Ignacio Goirigolzarri, explained that it is a capital injection, not a loan. In other words, the state is investing in Bankia, and only if things go really well will it recover its money — that is to say, the taxpayers’ money.
Summer is approaching rapidly, with hopefully “turistas” willing to spend the much needed euros in Spain. Somehow, the news just don’t want to start on a positive note. The big elephant in the European room sure is moving. Various news in local El Pais press over the past few days. Spain is crying.