The move was, of course, recognition of what was known for a long time — that Spain could not backstop its ailing bank sector alone. It would seem, however, that Monday’s rally might already be losing steam.
Are market acknowledging that the bailout only “buys time“? Or perhaps a lot of the €100bn of potential funding for bank recaps via Frob was already priced in so there was never going to be much upside by this point in time?
As Wolfgang Münchau wrote in the FT on Sunday, the proposal doesn’t even pass the most important sniff test, namely:
If you want to know whether any set of proposals for a European banking union is sensible, you should ask the following simple question: will it render Spain’s position in the eurozone sustainable?
… the idea for the European Financial Stability Facility to lend money to the Spanish bank recapitalisation fund, known by its Spanish initials Frob, does not meet this test. It reshuffles debt from one end of the Spanish economy to another. Spain’s total debt was 363 per cent of gross domestic product in mid-2011, according to a report by the McKinsey Global Institute, and with the prospect of a severe economic depression ahead, its crisis cannot be solved through a combination of austerity and liquidity support. The eurozone must recognise that some form of debt relief, or default, will be inevitable.
Some detail on that latter point would be welcome, but Spain is probably a significant way off from addressing it. Hopefully, some detail on the mechanics of the bailout itself will be more imminently forthcoming. The analysts at SocGen summarise it all in a note on Monday:
The plan was agreed at political level, but relevant details are still missing, mainly: (i) the way it will be financed (EFSF or ESM); (ii) the detailed calculations of extra-provisions and capital required. The planned indirect recapitalisation does not transfer the state guarantee for the Spanish banking system from Spain to the eurozone. Consequently Spanish bank funding cost are likely to remain tied to Spanish government debt and a step change in bank funding cost remains elusive. Moreover, the eurozone deposit insurance is not (yet) part of the plan, thus we are likely to still see deposit outflows (albeit at a slower pace). The ECB might find it easier to take additional measures following a recapitalisation, in particular offering another LTRO and resuming bond purchases. However, we do not see this as a done deal yet.
Will the ECB now step in? Should the ECB step in? Has it already done so, lunchtime on Monday?
Those questions aside, spare a thought for Spain’s banking giants: BBVA and Santander. It seems unlikely that they will take support from Frob, but if they are to cover their capital shortfalls, they may to have to sell some of their crown jewels, i.e. subsidiaries abroad. From SocGen:
Specifically, BBVA is exploring the disposal of the pension fund business in LatAm, while SAN announced the IPO of the subsidiary in Mexico. While the mentioned actions would be enough to cover the RDL 18/12 [the decree that requires Spanish banks to increase their capital as enacted by the Spanish Board of Ministers on 11 May 2012] impact and capital shortfall, in the event of a larger magnitude clean-up BBVA and SAN may be forced to further subsidiaries minorities disposals (read BBVAs Bancomer and SAN Brazil) and to cut the dividend.
After an initial bout of optimism, it wasn’t looking good at pixel time: