Distributing Spain’s bank bailout funds | FT Alphaville

Distributing Spain’s bank bailout funds

Bloomberg reported on Thursday that the first €30bn of Spain’s bank bailout fund is “imminently” going to be making its way to Bankia.


… because of restrictions the European Central Bank imposed on bank borrowing, according to a person familiar with the matter.

The ECB last month imposed limits on how much it will lend banks against government-guaranteed bonds. The rule change meant Spain had to ditch a plan for nationalized lender Bankia group to get a loan from the Frankfurt-based central bank, said the person, who asked not to be named because the matter is private.

Bankia group … will now get the first portion of the country’s European Union cash imminently.

A bit confused? We were.

The ECB rule change on collateral was this one, and this was Spain’s original trial balloon for recapitalising Bankia with government-guaranteed debt pledged at the central bank. It soon became about ensuring liquidity for Bankia, amid a collateral shortage for weaker Spanish banks.

The confusing bit is when capital and liquidity slip and slide over each other in these plans. The €30bn initial tranche of Spain’s bank bailout is (according to the bailout memorandum) is because “until recapitalisation of banks has been fully effected, individual banks may find themselves at risk”. The recapitalisation tools could be eligible as ECB collateral of course (the EFSF’s FAQ says that “it is expected that EFSF/ESM mostly provide bonds” under the programme, versus cash).

Bankia’s problem may not be so much ECB rules as the long period of delay until now in restructuring the lender, the main piece of conditionality here. Spain’s eurozone lenders might prefer to see this stuff confirmed before they hand over recapitalisation funds.

Or as Thomas Costerg, Standard Chartered economist, said to us on Thursday:

…the situation is still very unsettled among the weaker banks, as rating downgrades are putting pressure on their assets, while clearing houses are raising their haircuts, all of this further affecting the weaker banks’ collateral pool and liquidity position. The Spanish TARGET2 deficit rose to a new high of EUR 415bn in July as the Spanish banking system, on aggregate, increased its reliance on central bank funding.

It is difficult to understand what’s going on behind the scenes, especially between the Spanish government and the European partners. The common understanding is that the first EUR 30bn tranche should be released soon; that said, some European partners may want to see more progress and clarity on the reforms to the Spanish banking sector, like the promised resolution mechanism and bad bank.

But that’s not the only report on Thursday of demands on the bank bailout fund.

The Spanish daily El Confidencial is reporting that Madrid is negotiating to be allowed to use €40bn from the bank bailout to buy up sovereign bonds. It’s that confident that the financial sector will not need more than €60bn in capital, it seems. Curious, when the Eurogroup specifically designed the bank bailout to amount to €100bn in order to provide a “safety margin”. There’s already been confusion about whether the bank bailout would need an addendum to allow bond-buying.

We seem to be going round in circles.

Related link:
Spanish banks increasingly dependent on ECB drip – FT Alphaville
On the ECB’s attempts to ring-fence its balance sheet – FT Alphaville