ECB aid to Spanish banks matches Rock rescue

Discussion in 'Wall St. News' started by THE-BEAKER, Jan 29, 2008.

  1. Position yourself accordingly.

    This is a disaster waiting to happen.

    Ive been right on countrywide and right on the insurers.

    I dont hear anymore from the usual crowd of tossers on elite trader that were telling me to shut up on about the same subject.

    Obviously they were wrong and carted out.

    Anyway a chance to make some good money on this news.

    Spanish banks are issuing mortgage securities and asset-backed bonds on a massive scale to park at the European Central Bank, using them as collateral to raise money at favourable rates from the official credit window in Frankfurt.

    The European Central Bank,
    housed in Frankfurt's Eurotower
    The rating agency Moody's said lenders had issued a record €53bn (£39bn) in the fourth quarter, yet almost none of the securities have actually been placed on the open market. Most have been sent directly to the ECB for use in "repo" operations.

    "The market has shut down," said Sandie Arlene Fernandez, the author of the report.

    "Few, if any, of the transactions in the RBMS market (mortgage securities) have been placed since September. Some of the banks are hoping that the market will open up again but most are just preparing these deals to use as repos, which they can do since the ECB accepts AAA-rated securities," she said.

    The total volume of securities issued since the credit crunch began to bite in July has reached €63bn.

    Reliance on the ECB window appears to have kept the mortgage sector afloat despite the sharp slowdown in the Spanish property market and the de facto closure of the capital markets for this type of business, allowing Spain to avoid the sort of mishap suffered by Northern Rock in Britain and Countrywide in the US.

    The data appear to confirm suspicions that the EU authorities have carried out a covert rescue of the Spanish mortgage banking system.

    It may equal the taxpayer rescue of Northern Rock in Britain, and possibly exceed it in proportion to the overall size of Spain's economy.

    The key difference is that the ECB rescue operation in Spain has been disguised. A veiled method is necessary since the eurozone lacks a clear-cut lender of last resort. The IMF has warned that this gap in the architecture of of the single currency could prove serious in a crisis.

    Traders say the Spanish authorities are quietly turning a blind eye to use of the ECB window, and in some cases may be encouraging banks to go to Frankfurt - a claim denied by the Bank of Spain.

    Moody's said the total issuance of securities by Spanish banks last year reached €143bn, up 55pc on the 2006. Over €62bn were mortgage securities. The agency said the default rate was likely to rise, with mounting concerns among participants over a possible "housing crash". Some of the mortgage securities have already begun to draw on their reserve funds.

    David Owen, Europe of Dresdner Kleinwort, said Spain could face serious difficulties this year as the excesses of a decade-long boom finally catch up with the country.

    "The size of the Spanish corporate sectors financial deficit is truly is really scary. It rose to 14.5pc of GDP in the third quarter of 2007 from 10pc in the first quarter. This must be a record for a relatively large economy. Clearly this is not sustainable. Cost imbalances have a nasty habit of unwinding, quickly and very painfully," he said.

    Mr Owen said Spain was acutely vulnerable since it cannot cut interest rates or let the currency slide to cushion the downturn. "Several years of no growth could now beckon. It will be very difficult for the economy to pick itself up again inside EMU," he said.

    Spanish corporate debt is now 112pc of GDP. The current account deficit is 10pc of GDP. These are both flashing red warning signs.

    Among those issuing mortgage securities in the last two months are BBVA (€4.9bn), Caja Madrid (€2.4bn), Caja Catalunya (€1.6bn), CAM (€1.4bn), and Caja Castilla la Mancha (€800m).
  2. mokwit


  3. all the spanish banks have been borrowers at the liquidity window everytime there is cheap money on offer.

    the ecb is fucked and they know it.

    spain provided 55-60 % of all new jobs in the euro area over the last 5-6 years and has been part of the euro growth as well in a big way.

    you take that out the equation and the ecb will be forced to cut rates sooner than later.

    honestly talking about inflation the way they do its pathetic.
  4. Daal


    great, now how can we profit from this?
    short EWP on rebounds?
  5. Great Article Beaker, most of the articles I read tend to be US focused, so that was great.

    One question I have, I know repo agreements are relatively short term, but what happens if mortgage securities the ECB accepted as collateral defaults? Are the banks obliged by law to cover the default?
  6. interesting point.

    in the event they defaulted i think that would be a first for euroland.

    secondly the spanish players are taking tax payers cash and using assets as security.

    if the security turns out to be worthless then the central bank is at fault for not checking the quality of the asset.

    in these cases the central banks are gambling with the quality of the asset.

    i think according to my knowledge this happened in 1929 with the bank of the usa as it was called then.

    the other banks were encouraged by the fed to merge with it and absorb the loss but it never happened and went into default.

    anyway the ecb is playing a dangerous game here.

    mostly due to the fact that although the size of the spanish property/subprime/ mortgage problem is a lot less in dollar amount, compared to the size of the population its much bigger than the american problem and will have dire consequences for the rest of euroland which directly and indirectly is heavily invested in the spanish economy.
  7. Hello The Beaker
    I agree with you 100% -this is a disaster waiting to happen. I've spent a fair amount of time in Spain, and though it looks like and smells like a modern developed economy, in actual fact business operates on a "wild west" model there.
    Consider that much of the boom was funded to a large extent by eastern bloc and drug money -they don't call Spain the money laundering capital of Europe for nothing.
    I'm interested to know how you "position yourself accordingly?"
    It's tempting to short the ibex and any of it's constituents and I'm sure that it's a trade that will pay off. However with dogs like
    BBVA and FER and NHH already getting smashed in the summer -what will be the big winners? Shorting Telefonica?
    What are the best ways to short Spain? I have taken a hefty position against the euro vs greenback -what are you doing?
  8. Before or after the Fed's dollar desecration today?
  9. Before. This is a long term play and I'm quite happy to sit with it for a few years -I'm confident it will come right.
    I am thinking about a +dj -IBEX spread. I don't expect that to be an easy and quick winner either. What's the rush...
  10. Chriz


    I wouldnt be surprised if the ECB doesnt do anything if there is a recession in Spain. Spain isnt a big player in the european monetary union. They also didnt raise interest when the spanish economy was in a boom phase because the economy in France and Germany wasnt performing good at the same time.

    I am also pessimistic about Spain but i wouldnt short Telefonica since their business is international (lots of stuff in south america). I would either short the Ibex or pick some stocks that are very consumer dependent, maybe some banks and anything related to construction.
    #10     Jan 30, 2008