(The authors are Reuters Breakingviews columnists. The opinions expressed are their own)
By George Hay and Christine Murray
LONDON/MADRID, Aug 20 (Reuters Breakingviews) - Spain’s banks may have begun to get the Greek treatment. When Athens’ lenders began to use too much of the European Central Bank’s conventional liquidity support measures earlier this year, the ECB moved to shift some of the risk onto the Bank of Greece’s and the government’s own balance sheet. Something similar looks to be afoot in Spain.
As of the end of July, Spanish banks were borrowing 410 billion euros from the ECB, according to the Bank of Spain. That’s the most ever. But as significant was what happened to the section of the Spanish central bank’s balance sheet that usually denotes so-called “emergency liquidity assistance”, where losses are borne by Spain itself. From a lowly 2 million euros in June, this jumped to 402 million euros.
That may not sound much. But it could rise because the funding sources of Spanish banks are drying up. In May, they had already burned through their ‘marketable’ collateral eligible for conventional ECB operations, according to Deutsche Bank estimates. They might need to find more if Spain gets downgraded. But the ECB recently made one way to do this harder: it stopped accepting new government guaranteed bank bonds in early July.
Spanish banks still have two lifelines. One is that the ECB loosened another aspect of its collateral rules in January so banks could pledge ropier ‘non-marketable’ securities, such as ordinary loans. This benefited Bankia (BKIA.MC), the soon-to-be nationalised caja, which still has stocks of eligible loan collateral and has not yet tapped ELA, according to a person familiar with the situation. And the central bank could loosen its rules even further. The other lifeline is the 100 billion euro Spanish bank bailout that the euro zone and Madrid have agreed in principle.
Herein lies the ECB’s shakedown. Rather than hand over the bailout money, Spain’s saviours want to ensure that it properly restructures its banks via a bad bank for toxic assets and potentially, haircuts for bank creditors. Until it is satisfied with progress, the ECB can make collateral-starved Spanish banks take pricier ELA rather than its own funding.
The same dynamic may explain why ELA use for Greek banks ballooned by 72 percent to 106.3 billion euros between June and July: the ECB wants the Greek government and political parties to focus on delivering their austerity programme. Spanish banks may not welcome the comparison with their Greek peers. But it is becoming all the more apt.
- Spanish banks’ use of liquidity facilities from the European Central Bank rose to 410 billion euros at the end of July compared to 343 billion euros at the end of May, according to Bank of Spain figures.
- Their probable use of so-called emergency liquidity assistance (identified in the balance sheet entry, “Otros activos en euros frente a entidades de crédito de la zona del euro”) rose from 1.7 million euros in May to 1.8 million euros in June, and then up to 402 million euros in July.
- Bankia has not tapped so-called emergency liquidity assistance, according to a person familiar with the situation.
- Spain is now able to request the first 30 billion euro tranche of its bank bailout which is being held in reserve by the European Financial Stability Fund, according to its Memorandum of Understanding. A spokesperson for the economy ministry said on Aug. 16 that the funds will be received ”shortly”.
- Spain had 308 billion euros of securities eligible for use in ECB liquidity operations in May, according to Deutsche Bank estimates using assumptions from disclosures of Italian bank collateral holdings. However Spain had already taken 316 billion euros of ECB liquidity.
- Bank of Spain balance sheet, July 2012:
- Bank of Spain balance sheet, May 2012:
- Bank of Spain balance sheet, June 2012:
- Reuters: Greek banks’ ECB funding drops in July, ELA up [ID:nL6E8JD8B2] - For previous columns by the author, Reuters customers can click on [HAY/]
(Editing by Pierre Briançon and David Evans)
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