Thursday, June 17, 2010

Spain to Use $30 Billion "Fund for Orderly Bank Restructuring"


Thursday, June 17, 2010


Spain to Use $30 Billion "Fund for Orderly Bank Restructuring"; Spain's Borrowing Costs Rise; Is an EU or IMF Bailout of Spain in the Works?


Inquiring minds are wondering if an EU or IMF orchestrated bailout of Spain is in the works. Spain denies it, but rumors of secret talks are running rampant.

Please consider Spanish debt wilts amid €250bn rescue plan confusion


European debt markets remain under high stress on persistent reports that Spain is in secret talks with EU officials and the International Monetary Fund for a support package of up to €250bn (£208bn), the largest rescue in history.

The spreads on 10-year Spanish bonds jumped to a post-EMU high of 224 basis points above German Bunds as traders brace for a crucial auction by Madrid on Thursday. The relentless rise in bond yields replicates the pattern seen in Greece at the onset of crisis. Spain must raise €25bn of debt in a cluster of auctions in July.

"We're in a dangerous and stressful situation," said Gary Jenkins, a credit expert at Evolution Securities. "Spain is a big enough borrower to wipe out the EU's rescue fund."

Elena Salgado, Spain's finance minister, reacted angrily to a report in the Spanish daily El Economista claiming that the support plans are well advanced.

"It has been denied by the Spanish government, by the European Commission, and by the IMF. How much more can we deny it?" she said.

The story refuses to die, however. Three German newspapers have run similar stories over recent days, citing German sources. The markets are convinced that some form of contingency planning is underway.

"In our view there is absolutely no doubt that a backstop facility for Spain will be put in place should stress in the system remain," said Silvio Peruzzo, an economist at RBS,
Concern Over Spanish Bank Stress Tests

Bloomberg reports Yen Gains, Euro Weakens on Concern Europe Crisis to Slow Growth

The euro weakened against most major currencies after Spain’s central bank said yesterday it planned to publish the results of stress tests carried out on lenders to counter speculation it needs international aid. Last month the EU announced a 750 billion-euro ($920 billion) rescue mechanism to stem contagion from Greece as the risk premiums on Spanish and Portuguese bonds surged.

World Bank President Robert Zoellick said yesterday there are “challenges” ahead in Europe even if the rescue packages put together by authorities have “bought time.”

EU leaders will meet in Brussels to discuss the region’s economies and the so-called stability and growth pact. The Bank of Spain plans to make the findings of its stress tests public to provide markets with full knowledge of the state of the country’s banking system, Miguel Angel Fernandez Ordonez, the central bank governor, said yesterday in a speech.

“Investors continue to express concerns over Spain, especially whether the government can commit enough funds to ring-fence the banking sector,” Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut, wrote in a research note yesterday. The euro is likely to weaken to $1.15 in three months, he said.
RBS Sticks With IMF Bailout Idea After Spain's Denial

RBS Analysts Say Spain Rescue Credit Line From IMF Still Likely.
Some form of credit support for Spain from the European Commission and International Monetary Fund is still likely, even after a report of such a plan was denied yesterday, Royal Bank of Scotland analysts said.

Such a plan may become necessary as the government faces around 25 billion euros in bond redemptions in the next month, and those may not be easily refinanced given how bond yields have risen, they wrote. RBS said Spain could receive an IMF Flexible Credit Line similar to those received by Poland, Mexico and Colombia.
Spain Borrowing Costs Rise at Auction of 10-Year Debt

Tick, Tock. Bloomberg reports Spain Borrowing Costs Rise at Auction of 10-Year Debt
Spain paid an average yield of 4.864 percent at an auction of 10-year debt, compared with a rate of 4.045 percent at an auction on May 20, the Bank of Spain said today.
That is a rather hefty increase in rates. Spain will be in trouble if that continues for several months.

Spain to Use $30 Billion "Fund for Orderly Bank Restructuring"

Inquiring minds are reading Spain may use 30 billion euros for bank restructuring

Spain may use as much as 30 billion euros of its Fund for Orderly Bank Restructuring (FROB) to cover the financing needs of its banks, the Economy Minister Elena Salgado said on Thursday. The FROB, created to help the banking sector, can issue up to 99 billion euros to aid credit institutions.

"(The fund) will be more than sufficient for all of banks' needs," Salgado said during a television interview.

"It's going to be much less than (90 billion euros). These figures have to come from the Bank of Spain, but I would estimate, with total certainty, that it will be less than one third."
$30 billion may buy some time for a while.

However, odds are very good that Spain will need a bailout from the EU, IMF, or both. Then what?

Eventually Greece and Spain are likely to default and Italy is waiting in the wings.

Good luck with that.

Mike "Mish" Shedlock


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