Spanish Bailout

Although the released statement merely notes that a formal request for assistance is expected, it seems that Eurozone finance ministers have agreed to lend up to EUR 100m to Spain in order to allow the country to recapitalise its banking system. The final amount it to be determined by external auditors (the IMF has previously estimated EUR 40bn is required to raise CT1 to 7%, which would bring Spain in line with the Basel III timetable; rating agencies and others have come to higher figures). The money will be channelled through the FROB, Spain’s bailout fund, and will be exclusively for the purpose of bank recapitalisation; thus, according to Luis de Guindos, Spain will avoid conditions on its economic policies, although Olli Rehn has said that the European Commission will assess how much capital is needed by each bank, and it seems that conditions will be placed on Spain’s financial sector. Deutsche Bank has heard that the cost of the loans to Spain will be around 3%.

The exact form of the bailout is as yet unclear. It may come from the ESM (which has de jure seniority to other lenders) or the EFSF (which in the Greek case had de facto seniority). Holders of the subordinated debt of Spanish banks may or may not take losses, and the capital injections may come in the form of equity or coco’s.

I am not wholly surprised that Spanish banks have received a European bailout — it has clearly been on the cards for a couple of months, and the outcome that has happened — a direct bailout but with limited conditionality — is half way between the two scenarios I considered on 30th May. On that day I also wrote: “What will that mean, in practice? In other countries, coming under an EU programme has meant that they have been cut off from the bond markets. The Spanish case is different, however, because Spain is (probably) fundamentally solvent. My relative lack of concern about Spain rests on this premise. If Spain is fundamentally solvent and has resolved its problems with the banks, then it ought to have access to the bond market (in the form, mainly, of its own banks). So I do not see a programme for Spain as necessarily meaning it could not continue to borrow in other ways. The market ought to see the ESM assistance for what it is: lending for the specific purpose of bank recapitalisation.” Whether the market will now punish Spain by sending its bond yields sharply higher remains to be seen; I would expect Spanish yields to fall. If they do not, then I have the picture fundamentally wrong.

This latest bailout should be seen in the context of the shifting political debate within Europe. It will be used, of course, by both sides in the Greek election to try to bolster their cases, and I do not have a good sense of whether either side’s narrative on the subject will be either persuasive or decisive. More interesting will be the reaction of Ireland. That country’s government wrecked its finances by issuing a blanket guarantee for its banking system — something that I argued at the time was a mistake, but which saved Irish banks’ continental creditors from losses as the expense of domestic taxpayers. Ireland may now argue that, as an essentially virtuous country that was brought low by its banks, its bailout should be moved to the same soft terms that the Spanish seem likely to enjoy.

Greek Election

I do not have much to add to my previous comments on Greece, but I would just note that the election is due on Sunday. ND and SYRIZA were neck and neck in the latest poll, which I believe will be the last before the election. We will just have to wait and see whether ND and PASOK gain enough support to form a government. If they do, markets may well rally immediately; if they do not, there could be a further risk-off phase.

Is It Just Like Last Year?

At the start of the year, I saw various commentators suggesting that this year would be a replay of the last two, with markets faltering in the Spring and remaining moribund through the summer. Whether or not this argument brings out an aspect of the situation — I suppose that it does — it is to be resisted on principle. First, very different things happened in 2010, 2011 and 2012 and it is simplistic to treat them as having been essentially the same. Second, and more importantly, recent precedent has a strong attraction for the human mind, and it is a good idea to resist strong attractions for the sake of it. Our natural errors take predictable forms, and we should be particularly on our guard against those forms. Being wrong is part of this business, but I try at least to be wrong because my reasoning is wrong, not because my thought has followed the well-known paths of the animal mind.


  • China trade balance 18.7bn b.e. May. Back to normal post-crisis levels. Export growth was much stronger than expected, giving the market a bit of excitement.
  • China retail sales 13.8% YOY May. Now lower than the financial-crisis lows.
  • China industrial production 9.6% YOY d.e. May. Increased.
  • China fixed asset investment 20.1% YTD/Y a.e. May. Remains at multi-year lows. the weakness of this series goes a long way to explaining the weakness of China’s investment-driven economy.
  • China CPI 3% d.e. May.
  • China new loans 793bn b.e. and rose, May. Still quite high despite the slowdown. Is this because of the rolling-over of bad loans?
  • Japan final GDP 1.2% QOQ Q1. b.e.

This Week

  • UK manufacturing production (Tue)
  • US retail sales (Wed)
  • Swiss monetary policy rate and statement (Thu)
  • US CPI (Thu)
  • BoJ rate and statement (Fri)
  • US prelim. Michigan sentiment (Fri)