Official Denials From Finance Minister

Finance Minister Says “Nothing to Hide” Asks for ECB Audit of Banks, Denies Need for Rescue Fund

The Economy Minister Luis de Guindos, said Tuesday it has asked the European Central Bank (ECB) to assist in the independent audit of the Spanish banks’ balance sheets and is committed to full throttle work as has asked the Eurogroup, in order to have results within two months.

In addition Guindos assured that no minister of economy of the eurozone has said that Spain should come to the rescue fund EU to recapitalize their banks.

“There is nothing to hide, believe that the reform we are doing is a reform that clarifies and introduces transparency and clarity in balance sheets and the Spanish government has a will very clear about it,” stressed the Minister of Economy.

“Nobody has spoken at all to go to the bailout fund, is a matter of speed independent valuations,” has settled the finance minister when asked about whether Spain would seek assistance from the EU to help banks unable to meet the requirements of provisions providing for the reform.

Another 30 Billion Euros Needed, More Nationalizations Coming Up

Banks that do not return the aid within 5 years will be nationalized

The State nationalize financial institutions that do not return within five years aid articulated through convertible bonds, the so-called ‘coconuts’, designed to ‘clean up’ their balance sheets of real estate assets.

This is particular the Legislative Decree on Saturday published the Official Gazette (BOE), which requires banks additional sanitation EUR 30,000 million credit-linked unproblematic ‘brick’.

After this period, the Bank Restructuring Fund (FROB), through which the state sanctions the ‘coconut’, have a maximum of six months to implement in practice what would be nationalization of the entity.

However, the rule empowers the Bank of Spain to proceed with the conversion of shares before those five years when it considers “unlikely” that a particular bank can afford to pay for this help.

And if the entity defaults on the repayment of the aid, the regulator may also temporarily replace the administrative or management of the entity, which would eventually assuming his speech.

Spanish banks must set aside another 30,000 million for provisioning loans to real estate developer and healthy yet recorded incidents of payment.

Collapse in Credit

Banks Use ECB Money to Refinance Large Enterprises, New Credit To Households Down 80%

Loans from the European Central Bank (ECB) for Spanish banks are finally beginning to be seen in the figures for new credit. After many months of fall shows signs of stabilization and down only 1.5%. However, the news is not as good as it seems.

If we analyze the data by sector we find that the money has not been evenly distributed, but for families and small business loan new credit falls with increasing strength while for the general business credit do you see a recovery (+8.9% compared to March 2011). These loans are likely to mostly be treated refinancing to large companies in dire financial shape, given the terrible sales data that are being seen in recent months.

In the first graph we see the evolution of total credit, which appears to show signs of stabilization, at present, about 50,000 million / month, less than half that seen at the peak of the bubble. We can also see the credit business, which also stabilizes over 45,000 million / month, less than 60% of what was in 2007, and the family is declining and is already below the 6,000 million / month, less than a quarter of what had in 2007.

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The following graph we can see the evolution of new credit to households, broken down into housing, which fell by 21.7% compared to March 2011 (down nearly 80% from maximum), consumption, whose rate of decline increases to 10 , 2% (also down almost 80% from maximum), and other purposes, which drops to 9.8% (almost 70% from maximum). Families, therefore, despite the extraordinary liquidity injections to three years of the ECB (LTROs) were the tap is closing more and more credit.

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The situation for the small business credit, which is what you see in the chart below, is very similar. Increases its rate of decline to 14.8% and down almost 60% from highs. However, the situation for the great credit business is very different. Increases by 8.9% over March 2011 and down only just over 36% from highs.

There is no doubt that banks are giving priority to these large companies, which not only get much more credit than all other sectors combined (despite employing only a third of private sector employees) but also , are increasing their participation in the growing pie, as they have gone to get before the crisis over 40% of loans over 60% right now.

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The privileges of these big companies do not end here, since the conditions are also radically different for large and small loan. If before the crisis the difference used to be 100 basis points (bp), 1% or so, now the widening and extending more and reaches the 266 bp (2.66%).

Everything indicates that Spain is moving increasingly in the Anglo-Saxons called crony capitalism , but as an Iberian, ie banks that also pays to be the handouts to their favorites regardless of purely commercial factors. This can only affect an increasingly inefficient allocation of resources and a poorer functioning of markets, which will only further reduce the resilience of our economy in a globalized world increasingly difficult.

Ponzi Financing

Those charts show the Spain is banking system is in deep, deep trouble in spite of official denials from the finance minister.

Ponzi financing of the largest enterprises is the name of the game and the bond market has zeroed in on it. Yield on the 10-year bond has soared to 6.35%. I expect back above 7% soon.

Mike “Mish” Shedlock
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