Sunday, September 30, 2012



Since my last Blog the Spanish bank stress tests have been published and there has even been an “independent audit” performed by Oliver Wyman. Needless to say this confirms the EUR 60 Billion funding requirement given by that ever reliable source, the Spanish Government. This report not surprisingly has found support with both the ECB and IMF.

Once again I  would like to interpose with a couple of niggling facts and questions:

The latest figures show the Spanish Banking sector at end August are already borrowing  EUR 412 Billion from the ECB, so are in fact the funding requirements EUR 60 Billion or an  incremental EUR 60 Billion making a total of EUR 472 Billion, and amount representing well over 40% of the GDP?

The Spanish banking sector is bleeding deposits at a staggering rate, hence the need of the ECB cash, as the economy continues to implode, GDP falls, social costs rise, tax receiptes dwindle. The deposit base has fallen by EUR 180 Billion Jan-Aug 2012, with no sign of abating, compared to EUR 50 Billion Jan-Dec 2011.

When a banking system delevers due to a flight of deposits, it must generate new cash or sell assets, to pay off its liabilities to the depositors.

Normally, the banks can go to the capital markets and raise money, not an option because the markets are effectively closed, and they have little capacity to strengthen their balance sheets and cash positions by profitable operations.

The question then is what assets the banks sell and therein lies the rub.  The assets  in their books are held at “director’s valuation” completely artificial high values bearing absolutely no relation to the current market prices. Thus any fire sale of assets, real estate loans, but government bonds, in particular which are currently held at par value in the bank’s books would immediately trigger huge realised losses. Thhese would  be on such a scale that not even the Big 4 audit firms, and their fudged accounting principles could ignore it, and bankrupt  the entire Spanish banking system.

Of course the vultures, distressed debt private equity firms, and opportunistic HNW investors  are waiting in the wings for exactly this to happen. It is basically a repeat of the 1990 S&L crisis in the USA where fantastic returns were made by astute speculators.

So to maintain the lie of both national and banking solvency, Spain has no option but to turn to the ECB, who are already loaning them EUR 412 Billion and like Oliver Twist say “please sir I want some more”.

So the question then is what security the ECB, which is backed by the European tax payer, will get in exchange for these loans. The answer of course is the very same government bonds that had no little or no value in the first place.

However, these banks do not have an unlimited supply of bonds to pledge to the ECB, and if banking deposit outflows accelerate, requiring hundreds of more EUR Billion of ECB support, what security can be offered. Perhaps they will pledge the same worthless bonds twice or three times over to get more cash. This in banking parlance is called rehypothecation, but for the lay man it is called fraud.
Financial systems are based of liquidity and confidence, however policy makers only deliver de-levering and deception. Even the small bank depositor has fully understood the situation, and is emptying his bank account and stuffing the mattress.
The critical issue for the Spanish banking sector, has nothing to do with stress tests, but is to stop the bank run, because despite Mr. Draghi’s assurances that the means at his disposal are sufficient, he cannot prevent the entire Spanish banking system from imploding before his eyes.
This in turn could take Spain the ECB and the Euro-zone with it.
So at a time when one would have thought that honesty and transparency are paramount what does our leadership do?
They rig the numbers with a complicit audit report, which as shown above can be demolished in a few lines of text, and give it their blessing.
As our dear friend Mr. Juncker said “when the situation is really bad you have to lie”. Perhaps this should become the new motto of the Troika.

1 comment:

  1. I have friends in Spain and the thing the they tell me match what you are saying in your post. I wonder what is the next move of the Government. God bless everyone in need.

    Nazito from: Strategic Business Planning