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Spanish preventive bail-out to conquer Europe

by kcurie Wed Oct 8th, 2008 at 11:26:13 AM EST

Things are getting interesting in Spain... with the most conservative (in the good old sense of the word) and sound banking system the government has made a huge move to compensate for the lack of foreign liquidity and, if I may say so, has also done a preventive bail-out... and guaranteed all but the takeover of any foreign bank in trouble we Spaniards wish to control.

The news is below... and I need input from people who know more... but my rule of thumb has always been that Spanish banks are in trouble if around 25 % of people stop paying mortgages... and right now Spanish banks are increasing profitability at ratios of 10% above pre-bubble huge incomes.
[editor's note, by Migeru] Mortgage delinquencies have doubled in a year, and were up from 1.6% to 2.15% between June and July. This worries Solbes and the Bank of Spain says "there is no reason for unjustified worries [LOL!] because Spanish [financial] institutions are adequately prepared to face these challenges". (links in Spanish)


The announcement.....

La Vanguardia: El Gobierno creará un fondo de 30.000 millones ampliable a 50.000 para dar liquidez a las empresas (07/10/2008)The Government will create a €30bn fund, expandable to €50bn, to provide liquidity to businesses.
Zapatero confirma que la garantía mínima de los depósitos se elevará desde los 20.000 euros actuales hasta 100.000 euros por titular y entidadZapatero confirms that the minimum guarantee of deposits will be raised from the current €20k to €100k per beneficiary and institution
La segunda iniciativa anunciada hoy es el fondo con cargo al Tesoro de 30.000 millones de euros para comprar activos "de máxima calidad" de las entidades financieras y con ello facilitar el crédito a empresas y ciudadanos, con el fin de dinamizar la economía. "Se trata de un gran préstamo temporal y lo podemos realizar porque tenemos una deuda (pública) en unos niveles muy razonables", recalcó Zapatero, quien dejó claro que el Tesoro no asumirá "activos tóxicos", porque el objetivo no es resolver un problema de solvencia de las entidades financieras, sino propiciar el buen funcionamiento del mercado crediticio. The second initiative announced today is the Treasury's fund of €30bn to purchase "highest quality" assets from the financial institutions and so ease credit to individuals and businesses, with the goal of stimulating the economy. "It is a temporary loan and we can carry it our because we have the (public) debt at very reasonable levels.", stressed Zapatero, who clarified that the Treasury will not take on "toxic assets", because the goal is not to resolve a solvency problem of the financial institutions, but to foster the good functioning of the credit market.
El fondo estará vigente hasta que los mercados recuperen su funcionamiento normal y a podrán acceder todas las entidades financieras residentes en España, cuando los activos que se refinancien sean españoles. Entres dichos activos, según fuentes del Ejecutivo, podrá haber desde préstamos hipotecarios hasta créditos a pequeñas y medianas empresas, que las entidades financieras agruparán en fondos de titulización que serán valorados por agencias de calificación crediticia. The fund will be in force until the markets recover their normal function and will be accessible to any financial instituions domiciled in Spain, as long as the refinanced assets are Spanish. Among these assets, according to government sources, there may be from mortgage loans to loans to small and medium enterprises, which the financial institutions will group into securitised funds which will be valued by credit rating agencies.
Para comprar los activos de "máxima calidad", el Tesoro tendrá que emitir deuda del Estado que colocará al mejor precio entre inversores mediante una subasta. Si el fondo llegase hasta 50.000 millones de euros, la deuda del Estado se incrementaría en 5 puntos hasta llegar al 41% del PIB, aún lejos de la media europea, añadieron las fuentes. El objetivo del fondo, insistió Zapatero, es "prevenir riesgos" e "inyectar financiación en el mercado", ya que en estos momentos consideró que es la falta de crédito la que paraliza la actividad. To purchase these "highest quality" assets, the Treasury will have to issue debt which will be auctioned to investors [editor's note, by Migeru La Vanguardia omits that this is standard operating procedure for debt issues ]. If the fund reached €50bn, the public debt would rise by 5% to 41% of GDP, still far from the European average according to sources. The goal of the fund, Zapatero insisted, is to "prevent risks" and "inject financing into the market" [editor's note, by Migeru what does he mean by "inject financing"?], given that at this time it is the lack of credit that is paralysing [economic] activity.
Two final comments... I am glad I was right.. Spain is looking for money from Asia for the liquidity that does not come from the US... so in case the US collapses.... we have the money we need.

A further note... if all the Spanish money which is in €500 bills (so-called binladens in Spain because noone has ever seen one)  in the black market could be lured out to buy those newly issued government debt securities... I think we would hardly need any outside investment... that's the good side of having an extra 10% GDP than the formally accounted for... and it is an extra 10% GDP in the black market (mainly housing) during almost 15 years of growth... but these are only rumors...

The Guardian: Spanish hoards of €500 notes could aid liquidity (October 7 2008)

It is, perhaps, the strangest idea yet for pumping extra liquidity into Europe's troubled banking system. Spanish officials were yesterday reported to be looking for ways of encouraging Spaniards to remove the estimated 108M €500 notes they have hoarded in safes or under floorboards and take them to the bank. That averages out to at least two per Spaniard, or a total of €54bn, circulating outside the country's banking system.
Mmmhhhh why are the figures for new public debt and the black market money so similar?????? Black market to the preventive rescue?

As Migeru commented [editor's note, by Migeru over gmail chat], we may use the black money siphoned off the housing bubble over the years to cover  the losses of the banking system resulting from the popping of that same bubble and the global macroeconomic environment...

And as I pointed out, given that we were the good students in the Euro class, it is only fair that the Spanish banks take no new risk to finance new productive companies (Spanish debt will do just fine) and use the well-earned money of banks to buy all the European banks in trouble they may want or desire... So, the Spanish debt is used to attract the money from international markets that the Spanish banks can not get...

Que nos echen un galgo... [editor's note, by Migeru Catch us if you can?] I must say, we Spaniards are freakingly brilliant... if only we knew how to shunt a couple million workers from the construction sector to other industries... but ei if we ever manage to do that... First Europe then the World.

[editor's note, by Migeru] Hold your horses, kcurie. After reading the details of the plan as described by La Vanguardia I don't like what I'm reading one bit:

  1. This is like the Paulson plan: the government proposes to buy CDOs for cash. As there is no market for CDOs they will pay "hold to maturity" (i.e., near face value) not "market" (i.e., near zero) prices for the assets.
  2. allegedly (and Pierre will disagree) the saving grace of the Spanish banking system is that it didn't engage in a subprime securitisation binge - and now they propose to buy €50bn of newly created CDOs, which La Vanguardia doesn't name (scary!) but simply describe as "from mortgage loans to loans to small and medium enterprises, which the financial institutions will group into securitised funds which will be valued by credit rating agencies" (reasonable!)
  3. rating agencies are known to be unreliable and incompetent at rating CDOs. Also, they don't have the manpower to value them quickly enough for this plan to kick in quickly Update [2008-10-10 7:16:54 by Migeru]: from the discussion in the comments it would appear likely that the Tresury will buy CDOs which Spanish institutions parked at the ECB in the Autumn of 2007 and which are now due for repurchase. This could be done very quickly as they would already be rated AAA.
  4. if the government lures people's savings out of banks for their debt issue, they will be squeezing the banks' deposit base which is exactly the wrong thing to do. Apparently (I heard this from a friend yesterday and kcurie confirms) the Treasury is running an aggressive promotional campaign for a new issue of Letras del Tesoro (6-month treasury debt) as we speak. My first reaction on hearing that from my friend before kcurie broke the news of this bailout plan was "oh, shit, they're raising cash for a bailout within the next 6 months". The only way this debt issue can fail to take down a bank or two by sucking them dry of savings is if the public buys bonds with binladens.

So, no, I'm not so happy any longer. If the binladen bait works it will indeed have been an amazingly clever move and it will say something very weird about the Spanish political economy (the government engineering a money laundering scheme to save the banks, and the underground economy happily and voluntarily taking part in it).

In sum, I don't like what I'm reading and in part I don't because it's ZP and not Solbes delivering the message and I don't trust his grasp of economics. ZP has good advisers (Solbes, Sevilla, Sebastián) and he probably has learnt a great deal since the infamous I can teach you this in two evenings incident during the 2004 election campaign, but this is probably a plan put together by ministers, central bank and the banks just like the Paulson plan. Solbes is, at the end of the day, an orthodox economist.

Display:


A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Oct 8th, 2008 at 11:28:36 AM EST
Your point about how the credit funds to companies is the one a little bit weird...and it could turn out to be worrisome other than that I will keep that smile of the picture with this ZP movement :)

A pleasure...

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Oct 8th, 2008 at 01:01:49 PM EST
[ Parent ]
... or unstructured? It is in the structuring and then layering of structured pools of lower ranking streams that CDO's are a very effective vehicle in concentrating systemic risk.

If the CDO's are unstructured, then they simply average both stochastic and systemic risk.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Oct 8th, 2008 at 04:49:22 PM EST
[ Parent ]
I suppose if you took the loan portfolio of a bank or caja and broke it up into groups more or less randomly you'd minimize systemic risk... except for the very small institutions whose portfolios would probably be very concentrated geographically. There are 45 Cajas in Spain, most of them of provincial scope (Spain is broken down in 50 provinces and has 45M people in half a million square kilometres). One of the Cajas has only 20 branches. But I guess the size of the portfolio is correlatd with its diversity.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Oct 8th, 2008 at 05:06:53 PM EST
[ Parent ]
Why would that minimize systemic risk? Each piece would be on average as exposed to, eg, the risk of an economic downturn driving up foreclosure rates across the board, as any other.

Diversity protects against stochastic risk ... whether it protects against any given systemic risk depends on whether the assets are connected to the same system or systems, and in what way.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Oct 8th, 2008 at 10:00:27 PM EST
[ Parent ]
Explain then what difference does it make whether the CDOs are structured or not - we know the entire pool of loans is connected to the Spanish economy.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Thu Oct 9th, 2008 at 03:46:07 AM EST
[ Parent ]
Yes, that is the systemic risk exposure.

If you structure a CDO into (for simplicity), five equal tranches, with prepayments to the juniormost tranche, then the juniormost tranche underperforms its 20% of the face value of the income stream by 5 times the default rate. That is normally junk.

So, now take CDO's representing the juniormost tranches of a range of different mortgages pools, form a pool of their income, and divide the income into five tranches.

You diversify against stochastic risks, but if you underestimate the systemic risk of rise in the general default rate, you underestimate how how up the ladder the risk extends.

A 2% default rate leads to 10% underpayment in the juniormost tranche, leading to 50% underpayment in the juniormost tranche in the second tier. A 10% default rate leads to 50% underpayment in the juniormost tranche of the first tier, wiping out the two juniormost tranches of the second tier and the middle tranche pays out at 50% of its total claim.

And of course, if the original under-estimate of systemic risk was used to size the tranches to get the maximum number of CDO's of investment grade, you've basically locked in a guarantee that the "investment grade" assets in the second tier will under-perform their rating, since optimizing means putting the boundary as close as possible to what is considered an acceptable risk.

Senior tranches in the first tier of a pool with genuinely decent quality mortgages are not the worry ... its when layers are used in cahoots with information on exactly what risk profile is needed to get an investment grade rating, and/or when the underlying pool is junk (when structuring is used to paint a pile of chickenshit white and call it a basket of eggs), that the multiplication of systemic risk really kicks in.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Oct 9th, 2008 at 07:07:32 AM EST
[ Parent ]
The risk will be now on the government.. so far is clear... but I do not get why the risk for the government will change depending on how present credits are reorganized...

It is more like which credits will be passed on than how they will be passed.

That's the key about the government risk... will they take a normal sample or will they concentrated ont he ones which may gone burst more easily in case of meltdown?

Or is the structured and unstructured difference key for knowing which credit/debt the government will take?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Thu Oct 9th, 2008 at 04:00:48 AM EST
[ Parent ]
... its a lemons problem. Banks have an incentive to use the assets with the worst likely future performance that they can get away with, so they hold onto the best income potential of their current balance sheet.

So its up to the government to ensure that the minimum accepted quality is an acceptable quality.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Oct 9th, 2008 at 07:12:22 AM EST
[ Parent ]
Absolutely... and this can happen indeed with the credit to small and meidum companies.. not so much with mortgages which are all quite the same in Spain...

Mortgages are purely random shots, except for some very few cases that a bank could detect (some pre-clusters in the last month data).. but it is doubtful...

on the other hand.. on companies.. yes indeed.. it is about how much shit or no-shit is the government ready to accept and how much time they spend looking at it.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Thu Oct 9th, 2008 at 04:49:46 PM EST
[ Parent ]
... structure on the pool of mortgages. If there is a certain rate of default, that falls on the most junior tranche first ... no matter which mortgage in the pool was defaulting.

If it is actual pools of performing mortgages being used, and a new unstructured CDO is issued on top of that, that spreads the risk within the pool evenly across each CDO. If bought at a suitable discount, they'd be no worse than holding a diversified pool of mortgages directly (how bad that is will vary, from country to country, based on how much financial fragility entered into the home mortgage business).

If existing CDO's are being used, Senior tranches in the first tier, with the collateral being the pool of mortgages themselves, and with the mortgages being prime mortgages with very little funny business, they are sheltered by the derivative structure from risk, and with due diligence it seems plausible to treat them as quality assets.

As the structuring becomes more complex, it becomes more urgent to dig into the details to determine whether systemic risks are being concentrated ... and indeed, it may make sense to simply rule out using second tier or higher CDO's at all.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Oct 9th, 2008 at 05:09:00 PM EST
[ Parent ]
I sincerely hope they are not proposing to buy CDO2.

As Pierre has warned repeatedly, apparently Spanish institutions did a round of securitization last year for the sole purpose of taking advantage of the ECB's repo facility. I would hope that the need to make and rate them in haste would imply that they are relatively simple in structure. If what is happening is that the ECB is selling them back to the banks and the Spanish Treasury will buy them, we might be okay.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Fri Oct 10th, 2008 at 03:52:35 AM EST
[ Parent ]
that's a very interesting point.

Indeed , spanish banks could have prioritize mortgage structures in their balance sheet... but accordign to the sorces I read, everybody says that they do nto have them...in large amounts...The name behind it is "cedulas hipotecarias", and it has never been clear how the bank pays its clients the Euroibor interest rates (guaranteeed) from the mortgages

So , if there is a small amount of these kind of 5% default you lose everything  tranches I hope the bank takes it as a loss, pays the cedual hipotecaria and keeps on running.. because it has enough money...

My idea abut what the governmet was going to do is a) take most of the not structured mortgages (those which are in a general pool) and then take up until a certain risk in the structured so that the bank knows exactly the maximum loss.

I guess it will be known in cognress if this is the case, on the other hand, my doubt has always been how do you deal with private companies debt which are not structured...they have to make the structure on purpose and take the risk out of the bank. Basically, the government is going to do what the financer where doing plus takign the risk.. the government will structure the debt and the credit lines and buy it.. since it is not clear how it will be done, it is the nly part that I may not like.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri Oct 10th, 2008 at 05:49:47 AM EST
[ Parent ]
It will depend heavily on the regulatory history ... the US exposure is due to the Fed and state regulators seeing these assets on balance sheets of institutions in place where investment grade assets belong and never saying, "sorry, we don't care what the rating company says, these are not real investment grade assets. Clean up your book."

One reason that Australian banks are not first in line in this banking panic ... though they certainly are losing quite big chunks of shareholder equity right now ... is that the Australian regulator has been working on cleaning up balance sheets basically since the US bubble burst, while the Fed was looking for ever more ways to provide liquidity until "the return of normalcy". Obviously that was aided by the fact that Oz was still in a commodity boom at the time ... its easier to clean up balance sheets when there is new business coming in.

Also, if the total share of structured derivatives in the flow of mortgage creation was relatively small, then there would be much less pressure to create second or deeper layers ... and if the total number of mortgage pools issuing investment-rated and junk-rated tranches are smaller, on the one hand its harder to put together a diversified mix of junk CDO's from different pools, and on the other hand there's less pressure to do so, since there's less problem of overwhelming the market for the speculative junk offering the high returns.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Oct 10th, 2008 at 10:50:05 AM EST
[ Parent ]
If I am not mistaken the Bank of Spain disallowed off-balance-sheet 'conduits' and SIVs years ago.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Oct 10th, 2008 at 10:52:54 AM EST
[ Parent ]
I don't know the details of prudential regulation in Spain, I assume that the Bank of Spain is the sole/lead prudential regulator for the banking system.

Of course, in the US, with an undersized banking sector and oversized capital markets, just doing that for banks would not have sheltered the US from the current Panic, but it still would have reduced the exposure for banks as such.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Oct 10th, 2008 at 11:01:10 AM EST
[ Parent ]
For the Structured Investment Vehicle and its acronym, SIV, any idea of which originally came first to the mind of their originator?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 10th, 2008 at 11:10:44 AM EST
[ Parent ]
... structured investment vehicles were invented first, and then the generic term created after as a way to talk about them in general.

But the term itself ... my, goodness, what a solid sounding thing. "Structure" ... who can be against structure? You want a chaotic vehicle instead? And "Investment" ... much, much better than speculation.

In choosing between "Ramshackle System-Risk Amplifying Vehicle (RSRAV)" and "Structured Investment Vehicle (SIV)", the second sounds much, much better.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Oct 10th, 2008 at 12:07:42 PM EST
[ Parent ]
Funny how value seems to leak out of them like water from a sieve.  I wondered if they had been invented by some Enron type jokester who first conceived of a seive like structure from which he could benefit and yucked it up.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 10th, 2008 at 12:18:42 PM EST
[ Parent ]
No, Enron did not invent much of anything except a corporate culture of financial gimmickry to try to get something for nothing ... off the balance sheet transactions, structured investment vehicles ... the hard part is either getting a regulator to sign off on it or getting some pollie to take the regulator out of the game.

And of course that invention was only a re-invention of something invented countless times before.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Oct 10th, 2008 at 01:18:39 PM EST
[ Parent ]
It is in spanish.. but here is an excelletn link.. and an explanation of why the mortgage buy is generally a good idea and will shield the spanish economy...

http://www.soitu.es/soitu/2008/10/09/actualidad/1223568245_318730.html

I do not know if you read spanish.. I hope... it basically says tat cedulas are not SIV (they were forbidden) nor CDS nor CDO... they were bonds given by the bank insttuion to pay with the guaratee of the insitution, the mortgage and the building (whcih  belogns to the bank if its nt paid) plus the 20-30% amount of direct cash payment.

If there is a massive mortgage default, banks will have to deleverage by caliming debt or selling houses, to pay for the interest rates to te costumers that bought it... so if there is a meltdown they could end up having to sell hundreds of houses to pay and rebuy the cedulas... that would be crazy during a recesion.

With this buy, the government will take a risk up to a certain level.. if defaults are contained the treasury will earn a lot of money if there is a meltdown, the banks will have no meltdown and teh treasury willr aise debt 4 pints over the GDP.

Another completely different issue are the private comapanie debt that banks have now...

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri Oct 10th, 2008 at 12:58:59 PM EST
[ Parent ]
... mortgage market of the 50's and 60's, especially the cap on mortgages at 80% of property value.

And, no, I do not read Spanish well enough to read that in the original, but I read Spanish well enough to follow it in the Babelfish translation.

The systemic risk is that broad-based default of the mortgages would lead to solvency problems at the institutions that guarantees the bond. The difference between an unstructured CDO on the same pool of mortgages is that with an instructured CDO, the holders would pay for the haircut if there was a spike in foreclosures, while with the mortgage-bonds, its the bank pays for the haircut.

And, no, there is none of the concentration of systemic risks that comes with structured CDO's.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Oct 10th, 2008 at 01:41:47 PM EST
[ Parent ]
Exactly... this is why I did nto see that a big problem ont he mrotgage problem.. it is a tailor-amde solution for Spain...

but as you I ahve said pre cisely, the bank debt and credit on companies can look very much a structured vehicle created and bought byt the treasury...

so your point about asking for guarantees in equities makes a lot of sense.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri Oct 10th, 2008 at 04:13:40 PM EST
[ Parent ]
... this is why I suggest that €1:€1, the acquisition of assets be matched by the issue of Senior Preferred shares, at a penalty dividend rate over the rate of the government bonds funding the acquisition, with heavy strings attached to non-performing Preferred dividends, and with warrants for further Senior Preferred shares on the net loss on the acquired assets.

That provides liquidity, and shifts the balance sheet from debt to equity making the bank a better risk for lending to, and takes the warehousing of sine if the dubious assets off the banking sector's balance sheet where it can easily act as a drag on credit for quite a long time.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Oct 10th, 2008 at 10:57:36 AM EST
[ Parent ]
It seems a good idea...

specially on the actives related with private debt.

A leasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri Oct 10th, 2008 at 01:00:19 PM EST
[ Parent ]
The mysterious question is why anyone would take their 500 EUR notes from the mattress to buy government bonds at this time? Can anyone explain the reasons to me?
by Metatone (metatone [a|t] gmail (dot) com) on Wed Oct 8th, 2008 at 11:42:11 AM EST
Another way it can work is this.

The extension of deposit guarantee from €20k to €100k will lure the binladens out into banks' savings, and that will compensate the flow from ordinary savings to government bonds. The net effect will be as if the bonds had been purchased with binladens. Maybe this is part of the reason for Spain raising the guarantee above the EU's agreed new minimum of €50k. Spain's per capita incomes are not among the highest in the Eurozone so it makes no sense that we'd have among the highest deposit guarantees.

Otherwise, if it works it will say something really weird about the Spanish political economy.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Wed Oct 8th, 2008 at 11:47:23 AM EST
[ Parent ]
... up from $100k to $250k (€67k-77k to €167-192k, assuming $1.30-$1.50/€).

The argument was that while the original amount is adequate for most households, it is not adequate for all small businesses bringing their payroll onto account.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Oct 8th, 2008 at 04:53:55 PM EST
[ Parent ]
I'm not aware of Spain giving any reason for the €100k limit.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Oct 8th, 2008 at 05:07:53 PM EST
[ Parent ]
laundering.. bring it here and now is white!!!

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Oct 8th, 2008 at 01:02:19 PM EST
[ Parent ]
That may or may not work.

My grandfather has bought all his last cars in cash! I doubt any tax free guarantee would make him bringing his money into a bank.

A grandfather of an uncle in law had 30,000 Euro in his basement. It was changed from DM to Euro and I think it was even totally legal income. There are simply weird people...
Maybe it will work, when the interest is high enough.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Wed Oct 8th, 2008 at 10:17:50 PM EST
[ Parent ]
It's voodoo IMHO.

But Spain already squeezed out a large amount of cash out of the underground economy in the late 80's and 90's.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Thu Oct 9th, 2008 at 03:48:22 AM EST
[ Parent ]
http://www.securitization.net/article.asp?id=1&aid=8258


 What deals have been done in the European primary market since last August have been primarily structured for ECB repo collateral. For example, according to data from the Bank of Spain, Spanish bank use of the ECB window rose to a record high in April, which is consistent with what has been seen in terms of primary retained securitization deal flow.

In May, ECB repo funding to Spanish banks (including foreign entities with offices in Spain) had risen to 47.88 billion ($74.1 billion), from 20.28 billion a year ago, according to the Bank of Spain.

The spanish banks (or more specifically, the cajas actually), already have dozens of billions of securitized domestic shitpile, repo'ed at the ECB.
They have been securitizing it only for the sake of getting new money in exchange (there is no private market for this any longer).

The govie fund looks tailored to take these shitpiles when the ECB won't roll the repo (presumably because it becomes impossible to pretend that the underlying loans are still performing). The 2.x % delinquency rate in Spain seems to me, straight out of la-la-land. There have been way too many loans with no money down, 40% of revenue in payment, variable rate with initial euribor @ 3.5%. The true delinquency rate simply cannot be single digit. Now the banks might prefer not to call these delinquent, and give a free neg-am option to the borrowers...

Pierre

by Pierre on Wed Oct 8th, 2008 at 12:13:03 PM EST
There is nothing in what you say that seems unreasonable in the least. I just have anecdotal evidence that it was still hard to get a mortgage all along, but who knows what the smaller cajas were doing. Also, whether or not the mortgage standards were lax the fact is indebtedness has at a record high and Spaniards were acquiring bad habits such as home equity withdrawals and abuse of credit cards.

Now, on the argument that this may be a way for the Treasury to roll over the repos that the ECB won't, I don't think Solbes could have said "we're not going to purchase 'toxic assets' but 'highest quality' assets, that is, from mortgage loans to loans to small and medium enterprises, which the financial institutions will group into securitised funds which will be valued by credit rating agencies" with a straight face. Clearly ZP doesn't know the difference (namely, none) between a CDO and "loans securitised by the financial institutions and valued by rating agencies" so he can say these things with a straight face. And an AAA CDO is still AAA, right?


A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Wed Oct 8th, 2008 at 02:28:41 PM EST
[ Parent ]
The mrotgages are clearly AAA rated accoridng to any international standard.. which I guess rationallyit means that in tough times 5% will default.

Another issue completelya re private credit funds.... it all depends on the small company... that's the real clear point.. i think the government is taking the risk for those small and medium companies... but it might be shitpile with total risk... or jsut medium risk of default in a bad year..

I guess is probably the later... liberating the banks from any outcome of the crisis... leading to ready-buyers spanish banks... to buy abroad.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Oct 8th, 2008 at 02:40:09 PM EST
[ Parent ]

http://www.euromoney.com/Article/1884656/ABS-Spanish-banks-take-ECB-repo-with-both-hands.html


ABS: Spanish banks take ECB repo with both hands
Jethro Wookey

It seems they may be using support to grow balance sheets rather than to roll funding.

European banks are issuing asset-backed securities in massive amounts and pledging them to the European Central Bank as collateral on its term repo funding. Since September, more than 50% of European ABS issuance has been used as ECB collateral. With banks bereft of other viable funding options pledging so much to the ECB for repo financing, it will become harder and harder to return those banks to a normal funding environment. "The ECB will keep taking collateral," says a eurozone banker. "It will be a long, hard slog to get out of this."

Around 10% of the ECB repo funding has been absorbed by Spanish banks. The total securitization issuance by Spanish banks last year was €143 billion, up 55% on 2006, and none has been seen on...

Just google up "spanish securitization repo ecb", will throw you into an abyss of armageddon statistics...

Pierre

by Pierre on Wed Oct 8th, 2008 at 12:16:50 PM EST
The ECB has announced to tighten the rules, and introducing stronger haircuts on collateral from February on.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Wed Oct 8th, 2008 at 10:14:58 PM EST
[ Parent ]
Around 10% of the ECB repo funding has been absorbed by Spanish banks. The total securitization issuance by Spanish banks last year was €143 billion, up 55% on 2006

If that is true, ZP's €50bn fund doesn't even begin to cover what is needed...

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Thu Oct 9th, 2008 at 05:50:33 AM EST
[ Parent ]
Let us hope that, should the Spanish banks try to conquer Europe, it would turn out better than Iceland's attempt to buy the world!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Oct 8th, 2008 at 12:53:53 PM EST
The worst part of the  program is the external rating... it is really not worthy the paper is written over it.

The other tricky part is Migeru points about people leaving banks and buying the debt ... this is where the binladens come to the rescue.. the way to lure them is to clean the money.. government laundering.

The good part is that the government is not going to buy shitpiles.. it is basically normal groups of AAA rated mortgages in the US. it is true it will be bought at maturity.. basically conting that people will mostly pay...

If defaults do not reach 5% the government wil make a lot of money.

A final note,  I am still on the brilliant move side... but it can change if the model for small and medium companies funds is not clarified. What does thids fund exactly means?.. it is direct credit by banks which is dangerous? What does it exactly mean? Is the shitpile there? How is this going to be transformed to credit to companies?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Oct 8th, 2008 at 01:00:33 PM EST
that's the good side of having an extra 10% GDP than the formally accounted for

Wow, Spaniards are really honest people. In Germany it is usually estimated, that the black market is 15-20% of the GDP. Given that contruction and tourism are among the top sectors for black market activity and that these are rather strong in Spain, 10% is really not much.

Cleaners in private homes are nearly 100% black market in Germany. Care for old people ditto, well just about any close to home economic activity like gardening, private lessons, sometimes even car repair.
 

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Wed Oct 8th, 2008 at 10:23:27 PM EST
Yes.. this is ture...

but somehow we happen to ahve most of the 500 bills... which frnakly I quite not get... maybe it is related with the fact that here in SPain there is a few with a lot of money or that the few like the 500... while in germany is more spread without a big cluster of super-rich staying out of the system.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Thu Oct 9th, 2008 at 04:03:00 AM EST
[ Parent ]


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