The ECB’s OMT is beginning to have an interesting effect on the what is happening in Europe, particularly Spain. Spain has already requested a €100bn line of credit for its banking system, but a I have mentioned previously this is nowhere near the end of it. It is now expected that the country will need to seek a full bailout with one of the European stability programs which will also trigger the support from the ECB. The stability program will, however, come with strict conditionality and there certainly appears to be resistance on behalf of the Spanish government to make the request.
So now we are in a policy limbo. The ECB’s program is approved and ready to go (to the increasing shrills of Jens Wiedmann), so in terms of the markets it is “in play”, yet the Spanish government doesn’t appear to be in any rush to use it. This has created a rather interesting dynamic because just by existing the OMT is bringing down Spanish yields which in turn is making the Spanish government’s insistence that it doesn’t yet need a bailout stronger.
On Tuesday ECB member Luc Coene warned the Spanish PM, Mariano Rajoy, against delaying the use of the assistance program claiming that it wouldn’t take long for Spanish yields to once again rise. I suspect this will be the case in the medium term, but overnight Spain managed to sell €3.56bn of 12-month debt at average yields of 2.835%, down from 3.07%, and €1.02bn of 18-month paper at average rates of 3.072%, down from 3.335%. The auction was well covered at 1.9.
So the OMT’s umbrella is currently doing the opposite of what Mr Coene claims, and in the meantime Spanish Deputy PM, Soraya Saenz de Santamaria, has re-stated that his government was still considering the terms of a European bailout and hadn’t yet made any decisions. This hesitation was also supported by Spanish business who again appeared to be in no rush:
The CEOE (Spanish Confederation of Business Organizations) today recommended the government “do not rush” in the decision on a bailout of the debt. The management has also expressed hope that both Madrid and the rest of capital “wisely used the time won” with an unlimited supply of bond purchases by the ECB. And he warned that some of the risk premium only be removed “if Spain does his homework.”
The recommendation has studied in Brussels Deputy Secretary General of the CEOE, Alberto Nadal, during a press briefing prior to his attendance at a meeting of the Economic and Social Committee.Nadal has described the offer of intervention by the ECB President Mario Draghi, as “the beginning of the solution, no doubt.” But he added that a mechanism is “subject to a complex political process,” which requires tripartite negotiations with the ECB, the Eurogroup (council of finance ministers of the euro area) and perhaps even International Monetary Fund.
Deputy Secretary of the CEOE considers that “the mere existence of this instrument has earned time.”And although considered essential a reduction of risk premium to facilitate corporate financing, Nadal has called prudence. “Rushing would be worse,” said at the headquarters of the CEOE in the EU capital
Last week the Spanish Economics Minister, Luis de Guindos, announced his government would release another round of ‘growth focussed’ reforms along with the country’s budget on the 28th of September, but it is difficult to see these as anything more than politicking in the lead up to an official request.
There is no doubt that the real economy of Spain continues to deteriorate. With 1 in 4 people of working age unemployed , forward indicators suggesting worse is yet to come and the government increasing taxation in the face of falling revenue it really is just a matter of time before external help is required. Overnight the spanish central bank released the latest figures on bad debts in the banking system and the numbers are the worse in over 50 years:
The value of bad debts held by Spain’s banks in July rose to 169.3bn euros ($221bn; £136bn), according to latest figures from the central bank.
The Bank of Spain said 9.9% of banks’ total loans were in arrears, up from 9.4% a month before.It was the highest bad loan ratio since the central bank began compiling the data in 1962.
A brief look at the underlying data ( below ) shows that the rise in bad debts is happening as households deleverage.
It is rumoured that Spain will officially request a bailout in early October so that a decision can be ratified at the next EU summit. This, however, may be dependent on how much support the ECB’s “whatever it takes” tool can give the country even while still in its holster. I expect jawboning from both sides to continue.