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<趙博士財經專欄之61> Spanish and ECB next road to face

<趙老師財經專欄之61>


Spanish and ECB next road to face



The dismal market reaction to the euro zone's promise to pump as much as €100 billion ($125.75 billion) into shaky Spanish banks—underlined by the high yield the government paid on Tuesday to raise short-term funds—is prompting a rethinking of the rescue's mechanics, which have heightened worries over Madrid's ability to repay its debts.


Spanish Prime Minister Mariano Rajoy relaunched a campaign to allow the euro zone's rescue fund to directly channel the aid money into the country's lenders, rather than through the governments—a demand that has previously run aground.


At the summit of the Group of 20 leading economies in Los Cabos, Mexico, Mr. Rajoy told his counterparts that it was necessary to "break the link between risk in the banking sector and the sovereign risk," a Spanish official said.


Officials in Brussels cautioned the momentum hasn't moved in favor of making such far-reaching changes to the Spanish bank-aid plan. But they said at least one issue is back on the table: putting bank rescue loans on equal footing with government bonds held by private investors. Germany has insisted that official loans should have a preferred status, meaning they shouldn't suffer losses even if private bondholders are forced into a restructuring.


Some analysts have blamed this prospective subordination of private creditors as contributing to the retreat of Spanish bond markets since the bank-bailout plan was announced 10 days ago. Others argue investors should assume official lenders will have preferred status anyway.


The precariousness of Spain's finances was underlined Tuesday, when the country had to pay sharply higher interest rates on €3.04 billion in short-term debt. The yield on Spanish 12-month bills jumped to 5.07%, from 2.99% on May 14, while the yield on 18-month bills rose to 5.11% from 3.3%. Although the yield on Spanish 10-year bonds slipped to 6.98% on the secondary market, it is still almost a percentage point higher than before the aid request.


The rise in rates at Tuesday's sale of bills, analysts said, is an ominous sign ahead of a Thursday auction in which the government plans to sell as much as €2 billion of two-, three- and five-year debt. Despite its rising borrowing costs, officials said there is no official talk of Spain asking for a full-fledged government bailout.


The Spanish bank bailout—and the wider market rout that has gripped the euro zone over the past week—will be discussed at a meeting of the bloc's finance ministers Thursday in Luxembourg. Mr. Rajoy is also meeting German Chancellor Angela Merkel as well as his Italian and French counterparts on Friday, giving the leaders another opportunity to discuss the aid deal. Spain's market troubles stem from doubts that the country will be able to repay its growing debt pile, leaving a shrinking group of investors demanding ever-higher compensation for lending it money.


The €100 billion now earmarked for Spain's banks is equivalent to almost 10% of its gross domestic product and would, if it is used in full, push its debt load to around 90% of GDP. While that is much lower than the debt burdens of Greece or even Italy, Spain is also running high deficits, a crash of property prices doesn't seem to have reached bottom, unemployment is close to 25% and the country is stuck in a bitter recession.


The European Stability Mechanism, the new euro-zone rescue fund that is expected to come into operation this summer and is the euro zone's favored vehicle for the bailout, has preferred-creditor status, meaning that it would get repaid before any other entity that lent money to Spain if the country were to default on its debts.


According to the ECB analysts said it is possible that the issue could be addressed by a summit in late-June of European Union leaders. "In the best case, language which makes clear that Spain's banking program would not be senior could be introduced into the EU summit's conclusions on June 28-29,"


My point of view is that it sounds like a nonsensical comment as mentioned above. How does one break the link between the banks and sovereign debt, when everything that happened so far worked to reinforce this link? Even most recently, the Spanish government worked to bail out Bankia, and since December, Spanish and Italian banks used the LTRO money from ECB to buy their local sovereign debt, in order to reduce the yields on their national treasuries. Now suddenly, Rajoy wants to break the link?

What Rajoy really means is that if ECB cant lend money to his country directly, or if Germany does not allow ECB to issue Euro bonds, then at least allow ECB to inject more money into local banks, thus easing pressure on their local treasuries. But since they are one and the same, the Germans would not agree. The Germans are unwilling to make loans to Spanish banks without the sovereign on the hook. This is consistent with the Spanish and German government's position for some time.

The Germans see the banks as the pass through entity to the government. Do you think there has been political pressure on the Spanish banks to buy it's own sovereign debt over the last fifteen years?

God bless Spanish government and ECB.



Dr. Chao Yuang Shiang
21-June-2012







凡事唯有投入,結果才能深入; 凡事唯有付出,結果才能傑出; 凡事唯有磨鍊,結果才能熟練; 凡事唯有不煩,結果才能不凡。
能與智者同行,你會不同凡響;能與高人為伍,你能登上巔峰。
你雖不能改變環境, 但卻可以轉換心境;你雖不能樣樣勝利,但卻可以事事盡力。
Dr. Chao Yuang Shiang (PH.D in management), Assistant Professor,Dep. of Finance & Institute of financial management, Nan Hua University.
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