“If the Spanish state has difficulty in financing itself outside Spain, then the difficulties will be even greater for those in the private sector.”
– BBVA chairman, Francisco Gonzalez
June 14, 2010 (Via Reuters)
Actually the problem is that the market is now conflating the Spanish state with the private sector.
And vice versa.
Deutsche Bank has been banging on about the potentially perilous connection between European sovereigns and their banks for a while now (UBS, we think, was the first to catch the connection, way back in September 2009, with Greece, and more saliently in February, with Spain).
Deutsche’s excellent fixed income team brings the loop up again in their latest note.
As they point out, European banks need to finance some €700bn over the next three years, and that’s just to roll over redemptions and interest payments. At the same time they’ve been effectively shut out of term funding markets in recent weeks. Issuance from European financials dropped to its lowest level since 1989 in May — though it appears to have recovered somewhat in June.
When similar things happened in late 2008, banks were able to issue using government guarantee schemes. For Club Med countries like Greece and Spain, that’s not really much of a benefit now. Instead, we have the European Central Bank stepping in with funding. But, as Deutsche have pointed out before, this can lead to a mismatch in European banks’ assets and liabilities. That in turn, limits the banks’ abilities to lend, and their ability to keep supporting their domestic government bond market.
Banks in places like Greece and Spain, you’ll remember, tended to use the ECB’s liquidity operations as cheap funding for an easy carry trade; they used ECB liquidity to buy higher-yielding government debt. Thus plenty of European peripherals have sizable stakes in their governments’ debt, and conversely, the fortunes of some European government debt markets are tied up with their banks.
Anyway, this (grim) sovereign-bank loop is one that’s finally increasingly being picked up by markets — particularly in Spain. To wit, the rolling correlation between five-year CDS on Spanish banks (BBVA and Santander) and that on the Spanish sovereign below, from Deutsche Bank.
It’s inching towards the 100 per cent mark, implying the market is beginning to view the two sectors as one and the same.
Take notice Mr Gonzalez. The Spanish state can’t save you now.
Bank balance sheet management, the European way – FT Alphaville
The tipping point for Europe’s banks – FT Alphaville
Europe’s grim sovereign-bank loop – FT Alphaville
Carry-ing on in Spain – FT Alphaville