Spain readies ‘nationalization’ of Cajas

The Spanish government is preparing a plan to outsource the control of the people’s banks by demanding larger reserves in a short period of time.  The result?  Banks will probably not make it and the government will ask foreign investors to take control of the Cajas.

AFP
March 6, 2011

Spain’s ailing regional savings banks are scrambling to raise billions of euros of fresh funds to meet strict new capital requirements by a Thursday deadline.

The country’s 17 savings banks, known as “cajas,” are weighed down by loans that turned sour after the collapse of a housing bubble in 2008 and are at the heart of fears the country could need an Irish-style international rescue.

Last month the government approved stricter rules on the amount of rock-solid core capital that banks must hold on their balance sheets, seeking to shore up confidence in the battered economy.

Under the new rules, savings banks must raise the proportion of core capital they hold to 8.0 percent of total assets from the current six percent, or 10.0 percent if they are unlisted.

The Bank of Spain will determine Thursday which savings banks have met the new core capital requirements and in the case of those that have fallen short, how much capital they need to raise to meet the new requirements.

Up to 11 of Spain’s 17 regional savings banks will need additional capital to reach the levels of solvency set by the government, the ratings agency Standard & Poor’s said last month.

The government estimates that all the savings banks will need to raise 20 billion euros to meet the new requirements, a figure many analysts describe as too low.

The state is threatening to take temporary stakes — a form of nationalisation — in those lenders that fail to abide by the new rules by September.

Credit rating agency Moody’s put a 50-billion-euro price tag Monday on the recapitalising of Spanish banks hit by the property market collapse.

“The government is trying to attract foreign investors for the cajas, so it is logical that it attempt to downplay the amount to make it more attractive,” said Gonzalo Gomez Bengoechea, a researcher at Madrid’s IESE Business School.

The government is encouraging the savings banks to recapitalize using private funds which gives them several options:

– selling assets;

– opening their capital to investors;

– listing on the bourse, which would require they become fully fledged banks.

Under pressure from the government, many of the savings banks merged last year, reducing their numbers from 45 to 17, to improve their efficiency.

Ten of these new savings bank groups have decided to transform themselves into banks, or are thinking of doing so, and of these five plan to list on the stock market.

Foreign investment funds — about a dozen according to Spanish media reports — as well as Spanish banks have shown interest in investing in the cajas.

BBVA, Spain’s second largest bank, has said it wants to “take advantage of opportunities” and “enter the game”.

Two regional Spanish savings bank groups, Caja Duero-Espana and Banco Mare Nostrum, are mulling a merger, Spanish media reported last week.

“Every move that can strengthen our project is welcome,” the spokesman for Caixa Penedes, one of the four banks that make up Banco Mare Nostrum, Alberto Puig, said when asked about the reports.

“Among the cajas, everyone is talking to everyone,” he added.

Another four savings bank groups have sold assets to raise their capital.

The Bank of Spain will allow cajas on a case-by-case basis until December to close stake sales to private investors and will give them until March 2012 to hold intial public offerings.

The Fed Distorts The Economy With Inflation

by Bob Chapman
International Forecaster
March 5, 2011

The Federal Reserve tells us we need inflation to overcome the overhang created by debt and its inflationary aspects. The inflation does not create jobs – it just distorts prices upward. We are told by the head of the Fed, Mr. Bernanke, that he can end inflation when he thinks it is necessary. That is not true, because if inflation ends deflation takes command and the economy collapses. There is no finely honed instrument for turning these two opposite effects on and off; thus, inflationary instruments have to be blunt and overused. That means more often than not that inflation is over implemented. This is the opposite of the Fed’s mandate of promoting price stability, full employment and in fact is used to prop up the banking system. Over the past three plus years the Fed has been attempting to assist the banks in getting rid of bad assets and these efforts may last for another fifty years. These banks hold more bad assets then they have ever held before. These problem assets are the result of excessive lending and speculation between 2003 and 2008, and low interest rates that lasted far too long.

The quality and existence were recognized in the credit crisis that began in 2007. Most of these impaired assets are still on bank books, but the Bank of International Settlements, the FASB, the accounting agency and the government say it’s perfectly fine to keep two sets of books. If you did that in your business you’d end up in jail, but it is perfectly fine for the financial sector and transnational banks to do so. That is what QE1 was all about – bailing out the financial sector and other elitist corporations. These bad assets, that haven’t been sold to the Fed, are frozen on the balance sheets of these institutions, perhaps in perpetuity.

Fed created inflation raises the real value of assets artificially, so that these bad assets appear to be appreciating when in fact they are not. Toxic securities that are being held by banks, brokerage houses and others, that were worth $0.30 on the dollar, are now worth even less. All the inflation in the world won’t change the value of these assets. It may help interim earnings, but it won’t help in the long run. These policies won’t work long term. The interest on debt now and in the immediate future will be greater than revenues generated. At the same time $900 billion is a nonsense figure. When all is said and done the figure will be almost double that at $1.7 billion. QE1 will provide for 14% real inflation in 2011 and QE2 will provide 25% to 30% inflation in 2012. QE3 will give us hyperinflation. Monetization will be king.

The die has been cast and it is disturbing to see Mr. Bernanke lying to Congress. What will he tell them when he has to admit he created $1.7 trillion, which has been monetized into inflation and that he still holds official interest rates at just above zero, but real rates on the 10-year T-note went to 4-1/4 then 5-1/4? The American public is going to be stunned.

Again, the Fed and the US banking system are in a box and they cannot get out. If they were to officially raise interest rates it would lead to financial collapse. If they do not want to raise rates they could curtail QE2 and as a result the economy would collapse, just like Japan did so in 1992 and they have been in depression ever since. Either choice would send unemployment to a U6 level of 37.6% matching that of 1933. Worse yet, if the Fed’s commitments were marked to market you would find the Fed to be insolvent, a condition that has existed for some time. It is not surprising that the Fed and its banker owners don’t want the Fed audited and investigated. Any sale of bonds by the Fed would drive bonds lower and yields higher putting downward pressure on the economy. Much of what the Fed is holding is MBS and CDO’s from QE1, when they bailed out lenders and select transnational conglomerates and insurance companies.

Such actions would render the Fed officially insolvent, which in fact they are already. Just to show you how terse the situation is their capital is about $60 billion and they have about $3 trillion on the balance sheet. Now you can understand why real interest rates have to be held low. The stock and bond markets have to be held up artificially so that the Fed’s balance sheet won’t collapse. What many do not understand is that almost all of what is on the Fed balance sheet has been created out of thin air and monetized. Part of that hot money and credit has offset the deflationary undertow; part is exported in dollar foreign balances and the rest of the inflation pass into the economy. This is the beginning of out of control inflation and the Fed is well aware of it. They quite frankly are not concerned that people lose their life savings. They only care about saving the financial sector, which owns the Fed, the government and transnational conglomerates.

Inflation will not stimulate the economy. It will hinder it and not create jobs, which is already evident. It is all lies, smoke and mirrors and psywar.

QE1 and QE2 have spread across the world exporting part of US inflation. This inflation gets stronger daily enveloping the financial world. Food prices have gone ballistic and in countries where food makes up 75% of income the result has been the overthrow of one government after another. Even the price of your clothes is going to triple. The cause of these problems lies with central banks and banks that control them in Europe and the US. It is just one giant fraud like too big to fail. There will be no recovery only continual efforts to sustain the criminal enterprise.

As inflation climbs, unemployment will grow and wages will remain stagnant so that the anointed can continue to accumulate wealth. The beneficiaries will as usual be the elitist connected corporations, all those crooks who do not go to jail. Soon profits for smaller and medium sized companies will diminish as they are forced to absorb part of price inflation. Needless to say, there will be no hiring.

People worldwide see the dilemma of the US, UK and Europe and that in part is why you are seeing turmoil that has had its beginnings in North Africa and the Middle East, not that the US, UK and Europe were involved in the uprisings, but the catalyst had been in place as well. The reason for change is higher food prices. The world public is tired of tyrants and governments that refuse to answer the needs of the people. Again, part of the reason for change is the discovery that these dictators and those who control governments have to be dispensed with. You might say, as Saudi Arabia goes, so goes the Middle East and North Africa. If the so-called monarchy falls in Saudi Arabia the entire region is up for grabs. That would spell the end of the petro dollar, which would signal the demise of the dollar. That is something to be aware of and to contemplate.

As you know, historically when you have bad episodes such as those we are seeing in North Africa and the Middle East that the dollar has rallied strongly. Not this time. The dollar is falling not only against the six major currencies, but also versus gold and silver. We could be headed toward a test of 71.18 soon on the USDX. That makes US imports more expensive and exports cheaper, which would cause a balance of payments surplus. The downward dollar pressure would continue though, because the $1.6 trillion deficits would continue. We believe as history is evaluated Ben Bernanke as well as Alan Greenspan will be found to be totally incompetent. Today we have price and monetary inflation that are terrible. Eventually as the economy and coming hyperinflation becomes manifest we will then see a fall we have all been anticipating for years into deflationary depression.

After three attempts to rally past 82 the dollar in the USDX has faltered again, this time to 76.48. There is technical support at 76 and fundamental support at 74 and 71.18. Current weakness is systemic, but it is being aided by QE2 and stimulus 2.

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Let’s talk European Double Dip

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RT

The US and Russia are gaining traction on an economic rebound, with China posting rudely healthy 1Q 2010 GDP growth. But its timeEurope double dip for Europe to get ready for Recession – the sequel.

Jean Claude Trichet is an urbane, intelligent and eminently reasonable man, and the ECB he leads has, as he rightly pointed out during Thursday’s Lisbon press gathering to announce a non rate movement, done a sterling job in defending the Eurozone against inflationary pressures for the better part of a generation.

Surrealism

But there was an air of surrealism that the late Luis Bunuel would have enjoyed. There were the press representatives all revved up for quick and punchy responses to the emerging contagion and what the ECB could offer. What they go was the ECB President languidly going on about Eurozone growth and inflationary pressures, and keeping the Eurozone budgetary house in order. He offered nary a word of substance about the fire which has broken out in its Greek kitchen, and even less in recognition of the potential for the curtains in its Mediterranean sunrooms to become part of the conflagration. It was sort of like a man reading out a weather report involving light breeze, some cloudy patches and fine and mild conditions in general – whilst on fire, and in heavily French accented English.

The truth be told, nothing more should be expected of him. His job is, as head of the ECB, to keep inflation rates at or about 2% first and foremost, issue warning about potential deviations from the inflationary comfort zone, and bend ECB monetary policy to maintaining or seeking it. He shouldn’t be expected to don red underpants and cape and try to be superman.

What he did say was that default wasn’t an option as far as he was concerned for Greece, but he also couched that by noting it was up to Greece, the nations lending to it, and the IMF to come to an arrangement to head that off. When asked directly about whether inflation or the Euro was the prime focus for the ECB, he was emphatic about the former.

Somewhere in the back of his mind however he must surely be countenancing the possibility of a further return to recession in Europe, and the likelihood that in the medium term he will need to cut rates once again in order to head off deflation rather than inflation, and to try again to get the Eurozone some traction on an economic recovery.

Borrowing costs heading north

For the simple matter is that the Greek debt, and the Eurozone response to it, is already starting to lift borrowing costs, and they could indeed jump considerably higher if the contagion he didn’t want to speak about yesterday were to, as appears increasingly possible, take hold in Spain, Portugal and Italy in particular.

This week already sees overnight and 3 month dollar LIBOR up, along with the LIBOR-OIS spread, as ‘Club Med’ CDS have widened sharply, and Greek Portuguese and Spanish government bond yields have pushed higher – to record levels for the latter two against the 10 Year German Bunds. A couple of screens away one can observe Greek three year bonds rising from 11-17% in a week, and other 3 year bonds from Spain and Portugal up a percent. Whilst it isn’t Lehman Brothers panic mode, there is still some way to go, and there is a faint whiff of counterparty risk coming from somewhere.

Lots of Eurozone debt

The reason for this is quite simple. A lot of Europe has far too much debt, and most nations have structural budget deficits adding to it. Greece might be out in front, but Portugal, Spain and Ireland are in the pack not far behind it, and the Italians are at best a half length behind them. The exposure of European banks to these nations is well over 2 trillion dollars. 2 trillion is also the total European debt rollover requirement of this year, with more than a trillion of that belonging to the Club Med watching their yield and CDS needs start to get pointy. Spain alone is mulling more than $550 billion.

Now at this point the first thought is that the Germans are the first logical place to look in terms of bailing all of this out and making sure that the liquidity keeps flowing. Notwithstanding the quite reasonable concerns of German taxpayers about bailing out what they see is profligate sun drenched laggards, and the pragmatic thought that German banks are amongst those where the money will end up, which is essentially socializing potential losses for them, with those same taxpayers picking up the tab, there is another fly in the ointment. Last year Germany passed a law limiting its federal government budget deficit to 0.35% of GDP from 2016. That means that opening the sluices now to help anyone too much could pressure that need.

This leaves – without wanting to point fingers of blame at anyone – a dysfunctional Eurozone large in any consideration of the future. And that counterparty risk starts to take a more overt shape.

Euro Banks bracing for a hit

Any possibility that Greece, and then possibly other nations, may either default, or restructure in some other way, is going to see the lenders – the banks – get less in the Euro than they are currently exposed for. That means potentially large writedowns. From there the next logical step for the banks is that they lend a lot less, and presumably jack up interest rates on what they have already lent. In the case of European banks there is an added issue in terms of their underlying capital base, which is in many cases less than their US counterparts. So that leaves the prospect of either a financial sector tightening due to higher borrowing costs for the state and major lenders, if not a financial sector tightening due to capital flight, a financial sector tightening due to banks having holes blown in their balance sheets, writedowns, or in the worst case, financial sector tightening due to banking collapses and corporate or state insolvencies.

With the increasing likelihood that Eurozone banks are likely to take a hit one way or the other, there isn’t a great deal the ECB can look to do. It could look to monetize debt by printing money, but that would let the inflation dog out of the bag and involve a lengthy negotiation process with a number of politicians from across the EU to get agreement on. It could look to buy any debt from banks and try and get banks in turn to buy sovereign debt, which would be the first step in taking over whole national banking systems and presumably would require a lot more lengthy political discussion – and Trichet did note at Thursdays press conference that the move to help Greece out this way announced last weekend had been arrived at as a one off. If the process of getting a game plan together for the Greeks together is any indication then any political approval process is likely to take time.

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