Defaulting banks - where will it stop?

[Jan Klimkowski]

Golem XIV nails the lying bastards:

The Momentum of Lies

By Golem XIV on May 11, 2012




Headline in the FT "Spain to force banks to set aside €30bn." This is a bad joke. One which ordinary Spanish people are going to pay for in blood.

First, €30bn is a joke because it is not enough and the Spanish central bank and the government know it.

Second, 30bn of what? The Spanish banks don't have 30bn of anything worth setting aside.

According to a Bank of Spain presentation quoted in an article by Bloomberg, the bad debt provisions of Spanish banks so far


would cover losses of between 53 percent and 80 percent on loans for land, housing under construction and finished developments.

The additional €30B announced today


would increase coverage to 56 percent of such loans,..

The tiny little problem here, as Bloomberg points out, is that this additional sum is still ONLY for covering losses on land construction and finished developments. Which means even this new' rescue, like those before it, has no provision in it ,


… to absorb losses on 650 billion euros of home mortgages held by Spanish banks or 800 billion euros of company loans.

That's €1.4 trillion in residential mortgages and business loans for which the Spanish banks have made….no provision.

Now it is true that default rates have been lower in Spain than in Ireland for example. But while Ireland has unemployment of about 14% Spain's unemployment is 24%. Very nearly 1 in every four of the workforce has no official job. Even if they are working in the black economy that still leaves the state with a vast shortfall in tax revenue. No matter which way you look at it it is impossible that Spain's Caja's are not going to find huge suprise' losses on their residential and business loans. Of course those losses are already there but being held off the books with central bank complicity. Why else would the central bank and government simply not make provision for such losses unless they knew they were hidden? The problem is how much longer they can be hidden.

Taking the likely losses on those residential and business loans in to account,


…banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, according to estimates by the Centre for European Policy Studies, a Brussels-based research group.

I take that estimate with a pinch of salt because, although I do not know the Centre for European Policy Studies, it does look to me, to be fairly mainstream if not right wing. Even so I think the figures are clear that Spain's latest bail out of its banking system is as doomed to failure as those which preceded it.

Then there is the second and more fundamental problem which is that the Spanish banks simply don't have €30B they can set aside as further provision for bad loans. How can I make such a stark claim? Actually its not hard. And this is why.



(Chart at link)





This chart from Reuters shows that Spanish debt you remember those successful bond auctions was NOT bought by the bond market at large (non-resident holders), it was bought by Spanish banks (domestic holders). Similarly Italian debt has been bought by Italian banks.

According to data from the Spanish Treasury quoted by another Bloomberg article, in just December 2011 and January 2012 alone Spanish banks and other domestic lenders increased their holdings of Spanish debt by 26% to €220. Which means they bought over €40 billion. So exactly how successful were those Spanish debt auctions?

Similarly Italian banks increased their holdings of Italian debt by 31% to a massive €267B in the three months ending in Feb. 2012.

The graphs make it starkly clear that neither Spain nor Italy has had any truly successful bond auctions in some time. What they have had is a suicide pact with their own insolvent banks.

Spain and Italy have desperately needed to claim that they were not locked out of the bond markets and could fund their borrowing. At the same time the largely insolvent private banks desperately needed cash and capital. Cash for day to day running and capital to meet minimum capital adequacy rules. Which just means the base of capital against which their massive book of loans sit upon.

The solution was called the ECB's LTRO (The Long Term Refinancing Operation), the brain child of the ECB's new President, Mr Draghi. The LTRO allowed banks to borrow direct from the ECB. This was a major departure for the ECB. The banks asked for loans which the ECB granted at a nominal 1%. To give you some notion of the size of this operation to keep Europe's in business, banks in Italy, Spain, Portugal, Ireland and Greece between them borrowed 489 billion euros on Dec. 21 2011 and 530 billion euros on Feb. 29. 2012. A trillion so far. I say so far because there is every reason to suppose the ECB will decide the only way to avoid a collapse in the banks they seem determined to keep from their maker is to pump yet more money in to them (LTRO3).

The banks that took the money then used it to do several things. First and foremost they bought sovereign debt as per the plan. That way the sovereigns could claim all was well with them. After all they could show suprisingly buoyant demand' for their debt/bond auctions, which rather marvelously kept down the interest they had to offer. The result was that the private banks were then in possession of sovereign debt that would have paid them between 5-6%. So, money they borrowed at 1%, bought bonds that paid them 5%. That is a straight bail out from the sovereign's tax payers of 4%.

Think about it. The sovereigns could have gone to the ECB themselves and borrowed money themselves from the ECB for 1%. Instead the sovereigns let the private banks borrow from the ECB at 1% and then the sovereign borrowed from the private banks (remember when a sovereign sells bonds/debt the buyers of that debt are lending to the sovereign) at 5%-6%. Why? Answer so they could say, We're not having to get bailed out by the ECB. No, we are selling our debt successfully to the market, who love us.' It was a lie but it made it sound as if the reovery plan' and the unpopular austerity policies must be working. And at the same time it allowed the sovereigns to bail out the private banks without having to tell the people they were doing so. Two lies for the price of one.

If we now take stock for a moment of who ended up with what, the picture becomes rather ugly. The insolvent private banks pretend to be solvent, but in fact what they have is a vault full of IOUs/bonds from their nations. The Nations claim to be selling their debt but have in fact sold it only as far as down the road into banks who are only alive at all because they are being bailed out.

And what of the ECB? Well former ECB board member Juergen Stark said recently in an interview with the German newspaper, Frankfurter Allgemeine that,


…the balance sheet of the euro system, isn't only gigantic in size but also shocking in quality.

The shocking' quality of the assets is because the assets' in question are the bad loans that Europe's private banks couldn't get anyone else in the whole wide world to accept as collateral. EVery tie the ECB bails teh banks out, each time it extends loans' it has to acceot as collateral for those loans whatever the banks have left. Which means the assets' that the ECB wouldn't accept last time.

All that has happened is that an elaborate debt laundering two-step has been put in place so that banks can be bailed out by nations who can be bailed out by the ECB. But it is done in such a duplicitous way that the banks appear to be merely getting a loan, the nations appear to be selling their debt as per normal and the Tax payer, who is actually footing the bill for both, is completely in the dark about the whole thing. THAT is the ECB and our European rulers in action. Feel shafted and lied to? You should.

Now however, the lie is unravelling. You see the key is that the private banks' bad assets, those that no one believes have any real worth, are taken out of the private banks and pledged as collateral' at the ECB who in return give them loans. The ECB of course reveals no details so no one can prove a thing. The private banks then use then loans they got from the ECB buy sovereign debt with that money. (Some, the really terminal, also use it for repo in order to keep breathing day to day). The result of this gyration, from the point of view of the private banks, is to replace worthless their assets with one's that are backed up by the sovereign nation. The ratings agencies will then look at those assets and say this is proof of how much support the sovereign is willing to give to their banking system. They call this sovereign uplift' and add this as a positive factor in establishing the solvency and credit worthiness of the private banks. And of course the sovereigns are also being helped by the banks who are buying their debt.

In a sense the idea is to get two cripples to lean on each other. As long as the two cripples stay very still you can see them as propping each other up. But if ever one or, heaven forbid, both start to wobble then the previously positive relationship suddenly looks very negative. Instead of propping each other up they look as if they are pulling each other down. And that is where we are now. If the banks look like falling over the sovereign will be left with a massive collapse which it will, as with Spain's recent nationalization of Bankia, try to foot the bill for. That will hugely increase sovereign debt. But who will they sell their debt to now? Even the banks who haven't yet collapsed are badly affected because they and their ratings rely on the perceived ability of their sovereign to support them. Which becomes more and more questionable with every bank that the sovereign has to save. As the sovereign is seen as more and more vulnerable , with larger and larger debt which it seems less and less likely to be able to sell, then the banks who have bought all their sovereign's debts are perceived as potentially being back where they started with a vault full of dubious IOUs.

If it all seems head spinningly circular, that is because it is. It is a cycle of lies and debt re-branding. As long as the momentum of the lie and of public belief is in the forward' direction then all seems to be well. Everyone is selling their debt, no one is being bailed out and no one is aware of who is paying. But if the lie and the momentum of belief goes into reverse then all the players start to look more not less vulnerable and at risk.

What has happened in the last week with the election in Greece and the unravelling of the lies and hidden bank insolvency in Spain, is that the momentum of the grand lie has started to reverse. If that reversal is not halted and the truth not quarantined then I believe there will be a another clamour raised by Europe's insolvent banks for the ECB to announce yet another emergency funding programme.

The fog of burning acidic financial lies that have been rained down on us for four solid years is finally meeting political reality and opposition. Suffering can be ignored and met with the police baton but it cannot be erased forever. We have yet to see what if anything M. Hollande will do in France and what will happen in Greece and in Spain. But the momentum of their lies is, for now at least, running against our oppressors.