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Spain risks crisis over vanishing reserves
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Spain risks crisis over vanishing reserves 8 Anni, 6 Mesi fa #1434

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Spain risks crisis over vanishing reserves

17/05/2007
Daily Telegraph


Spain's foreign reserves have plummeted to wafer-thin levels, leaving the country exposed to a possible banking crisis if the property market swings from boom to bust - despite membership of the eurozone.
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The Banco de Espana's holdings of foreign currencies and gold have fallen to €13.2bn (£9.02bn), equivalent to 12 days of imports.

Over the past two months the Banco de España has sold off 80 tonnes of gold, flooding the world market with enough bullion to dampen the usual spring rally. The bank has reduced its holdings of US Treasuries, British gilts, and other investments at a similar rate.

Total reserves have now fallen by two thirds from €41.5bn in early 2002. Greece and Portugal have seen a similar drop.

By contrast, the overall reserves of the eurozone system have remained stable. France (€76bn), Germany (€86bn), Italy (€59.5bn) have all kept holdings at full strength since the launch of the euro.

The Banco de España refused to comment on the sales, leaving it unclear why reserves have fallen so low, or where the money has gone.

It appears the bank has been draining the reserves to help finance the current account deficit, which has ballooned to 9.5pc of GDP, reaching €8.6bn in January alone.

"The current account is completely out of control," said Alberto Mattelan, an economist at Inverseguros in Madrid.

"We have the worst deficit in our history and worse than any other country in the western world. It has not yet become a 'street concern', but I can assure you that it is of great concern to us economists. This will turn bad over the next 18 months," he said.

It is often assumed that reserves no longer matter once a country has joined the euro, but this ignores a crucial element in the workings of the EMU system. It is responsibility of the 13 national central banks to act as lender of last resort in a crisis, even though they have no control over interest rates.

"Where this gets serious is if there is a property collapse in Spain and the banks get into trouble," said Prof Tim Congdon, an expert on monetary policy.

The first signs of a housing slump are emerging as the ECB raises interest rates, already up seven times to 3.75pc since December 2005. The shares of Valencia builder Astroc have fallen 77pc since February, setting off a sharp slide across the sector, with knock-on effects on banks with mortgage exposure.

Morgan Stanley said construction accounts for 17.7pc of GDP, even higher than the 15pc peak reached in Germany after reunification - a boom-bust saga that left German banks prostrate for years.

Spain's private sector has amassed $600bn (£300bn) in foreign debts. Corporate borrowing is 100pc of GDP. The overall stock of mortgages has increased sixfold in a decade. Household debt has reached 120pc of disposable income, largely on floating rates.

Prof Congdon said Japan was able to uphold its banking system in the post-bubble slump of the 1990s because the government could guarantee deposits. "You can't do that in the eurozone because there is no government to turn to," he said.

Each country is on its own. The ECB may interevene only if the crisis spreads across the eurozone, and it is forbidden from bailing out the member states. The International Monetary Fund warns that the structure leaves EMU exposed to "systemic financial risk".

Reserves are a key defence for each state, hence the EMU quirk that national banks retain the lion's share of reserves. The ECB has a token 13pc.

For now Spain is still looking rosy: growth was 4pc in the first quarter; the budget surplus is 1.8pc of GDP; and export share is holding up reasonably well.

However, the party is ending after a near tripling of house prices since 1995. In a report, The End is Nigh, Jamie Dannhauser from Lombard Street Research, said Madrid is now making matters worse with a new law to hit property speculators.

"This screams of closing the stable door after the horse has bolted. House price growth has clearly peaked and is decelerating quickly. Speculators appear to have got out already, sensing the dangers that lie ahead," he said.

The government cannot devalue its way out of trouble, so it will have to deflate. "Pain seems to be on Spain's doorstep," he said.

Re:Spain risks crisis over vanishing reserves 8 Anni, 6 Mesi fa #1435

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The Bank of Spain,the largest seller of gold this year

September 17 2007
The Financial Times


Spanish gold move boost for bullion

The Bank of Spain, the largest seller of gold this year under the central banks’ gold agreement, plans no more significant sales of the precious metal in a move that is likely to fuel further the recent surge in prices.

People familiar with the pact said Spain’s central bank had already achieved the bulk of its planned bullion disposals.

Analysts said the end of Spanish sales could reduce next year’s central bank gold sales and improve sentiment in the bullion market just as the gold price is approaching a 26-year high.

The gold price rose on Monday to a fresh 16-month high of $719.65 a troy ounce, underpinned by the weakness of the dollar ahead of Tuesday’s Federal Reserve rate-setting meeting.

The metal is within a whisker of the 26-year high of $730 an ounce it hit in May 2006. However, it is still about $130 below its all-time high of $850 reached in early 1980.

Large gold sales by the Bank of Spain, and lately by the Swiss National Bank, have undermined gold sentiment, analysts said. But the weakness of the US dollar and strong physical demand from India, the Middle East and China was pushing up prices.

David Holmes, of Dresdner Kleinwort in London, said that as well as speculative investors, the market was witnessing the resurgence of medium and long-term investors interested in structured gold products.

Spain has been the largest seller of gold under the current year of the central bank pact which runs to the end of September, according to data from the World Gold Council.

Spain sold about 149 tonnes, or 37 per cent of the total 399 tonnes sold by central banks in industrialised countries. The French central bank was the second largest seller with 99.2 tonnes.

The Spanish central bank declined to comment on gold sales.

The central banks’ gold pact, which runs until 2009, allows them to sell up to 500 tonnes of gold every year.

While developed countries have reduced their gold reserves, some developing countries have been modest buyers.

Hussein Allidina, of Morgan Stanley in New York, said official gold demand was coming mainly from oil exporting nations such as Russia, Kazakhstan and Qatar, as well as South Africa and Argentina.

“However, there is potential for this modest level of purchasing to increase should countries like China move to diversify enormous US dollar denominated reserves,” he said.

Re:Spain risks crisis over vanishing reserves 8 Anni, 6 Mesi fa #1436

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Spain faces frightening parallels to Britain

19/05/2007
Daily Telegraph


Spanish officials have furiously denied reports that the country’s property market is heading for a crash or that a clutch of banks may be in the same boat as Northern Rock.

Miguel Angel Ordoñez, the Bank of Spain’s governor, told the Spanish parliament yesterday that the country’s financial system was “immensely solid” despite the dramatic fall in the share price of mid-sized banks and construction firms geared to the deflating property bubble.

“The current turbulence has highlighted the downside risks to growth but Spanish institutions face this episode from strength. Exposure to [sub-prime debt] is insignificant: the problem is we don’t know where the losses are, or who owns what,” he said. “The biggest favour the banks can do is to come clean on losses.”

The central bank also denied reports that its financial institutions had required “emergency liquidity” along the lines of Northern Rock, but the statement failed to end doubts since Spanish banks have been able to borrow unlimited sums cheaply from the European Central Bank’s window.

David Taguas, the prime minister’s chief economic adviser, said: “To talk about severe adjustments or a meltdown in prices is ridiculous. That sort of crisis is unthinkable. We have…one of the most efficient financial systems in the world. That’s insurance in times of turbulence.”

The reactions follow a scathing report on the Spanish banks by Citigroup that sent tremors through the Madrid bourse. The note downgraded Banco Popular, Banco Sabadell, Banesto and Bankinter, warning the credit crunch had changed the picture for Spanish lenders that rely on the wholesale capital markets. It was exactly this sort of funding that caused Northern Rock’s troubles. The Spanish banks’ shares have fallen almost 40pc since April.

“Spain’s mid-cap banks have some of Europe’s lowest core capital ratios (6.12pc) and the highest loan-to-deposit ratios (182pc). The freeze in credit markets reverses all the prior positives for investing in these cap banks,” said Kato Mukuru, the note’s author.

He added the debt-driven M&A deals that enriched these banks are likely to become rarer in the new climate, while a mismatch of maturities would eat into profit margins. The banks rely on three-month paper to raise funds, but their assets are on a 12-month cycle.

Adding to the woes, the spreads on Spanish AA mortgage bonds have leapt from 21 to 100 basis points over Euribor.

The banks are highly exposed to the Spanish housing market. After rising 270pc since 1995, house prices have begun to fall in parts of northern Spain, slipping 2.1pc in Barcelona and Madrid so far this year. Over 98pc of all mortgages are priced off floating Libor rates, causing mortgage payments to almost double in under two years. Construction has reached 18pc of GDP, more than Germany (15pc) at the height of the reunification boom.

David Owen, an economist at Dresdner Kleinwort, said Spain was in danger of a serious crisis. “House prices may fall, but what is even worse is that the corporate sector’s deficit has grown so large that it needs to find financing equivalent to 10pc of GDP every quarter just to stand still,” he said.

“In an environment of easy credit and low rates, these excesses are not an issue, but it can quickly unravel as the mood changes. The problem is that a country inside EMU can’t get itself out once it reaches tipping point: it can’t cut interest rates or let the currency fall.”

While the extreme levels of household debt in Spain are similar to those in Britain, the abilities of the two countries to act in a crisis are quite different. Spain may face a replay of Britain’s ERM crisis in 1992, but this time without the safety valve of easy exit.

Re:Spain risks crisis over vanishing reserves 8 Anni, 6 Mesi fa #1437

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ECB secretly rescues Spanish banking system

Daily Telegraph, January 28, 2008

ECB aid to Spanish banks matches Rock rescue

Spanish banks are issuing mortgage securities and asset-backed bonds on a massive scale to park at the European Central Bank, using them as collateral to raise money at favourable rates from the official credit window in Frankfurt.


The rating agency Moody's said lenders had issued a record €53bn (£39bn) in the fourth quarter, yet almost none of the securities have actually been placed on the open market. Most have been sent directly to the ECB for use in "repo" operations.

"The market has shut down," said Sandie Arlene Fernandez, the author of the report.

"Few, if any, of the transactions in the RBMS market (mortgage securities) have been placed since September. Some of the banks are hoping that the market will open up again but most are just preparing these deals to use as repos, which they can do since the ECB accepts AAA-rated securities," she said.

The total volume of securities issued since the credit crunch began to bite in July has reached €63bn.

Reliance on the ECB window appears to have kept the mortgage sector afloat despite the sharp slowdown in the Spanish property market and the de facto closure of the capital markets for this type of business, allowing Spain to avoid the sort of mishap suffered by Northern Rock in Britain and Countrywide in the US.

The data appear to confirm suspicions that the EU authorities have carried out a covert rescue of the Spanish mortgage banking system.

It may equal the taxpayer rescue of Northern Rock in Britain, and possibly exceed it in proportion to the overall size of Spain's economy.

The key difference is that the ECB rescue operation in Spain has been disguised. A veiled method is necessary since the eurozone lacks a clear-cut lender of last resort. The IMF has warned that this gap in the architecture of of the single currency could prove serious in a crisis.

Traders say the Spanish authorities are quietly turning a blind eye to use of the ECB window, and in some cases may be encouraging banks to go to Frankfurt - a claim denied by the Bank of Spain.

Moody's said the total issuance of securities by Spanish banks last year reached €143bn, up 55pc on the 2006. Over €62bn were mortgage securities. The agency said the default rate was likely to rise, with mounting concerns among participants over a possible "housing crash". Some of the mortgage securities have already begun to draw on their reserve funds.

David Owen, Europe of Dresdner Kleinwort, said Spain could face serious difficulties this year as the excesses of a decade-long boom finally catch up with the country.

"The size of the Spanish corporate sectors financial deficit is truly is really scary. It rose to 14.5pc of GDP in the third quarter of 2007 from 10pc in the first quarter. This must be a record for a relatively large economy. Clearly this is not sustainable. Cost imbalances have a nasty habit of unwinding, quickly and very painfully," he said.

Mr Owen said Spain was acutely vulnerable since it cannot cut interest rates or let the currency slide to cushion the downturn. "Several years of no growth could now beckon. It will be very difficult for the economy to pick itself up again inside EMU," he said.

Spanish corporate debt is now 112pc of GDP. The current account deficit is 10pc of GDP. These are both flashing red warning signs.

Among those issuing mortgage securities in the last two months are BBVA (€4.9bn), Caja Madrid (€2.4bn), Caja Catalunya (€1.6bn), CAM (€1.4bn), and Caja Castilla la Mancha (€800m).

Re:Spain risks crisis over vanishing reserves 8 Anni, 6 Mesi fa #1438

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Foreign banks flee Spanish property debt

Daily Telegraph, Ambrose Evans-Pritchard, 04/04/2008

International banks are scrambling to sell their holdings of Spanish mortgage debt at a steep discount, fearing that the country may be sliding into the worst economic downturn in its modern history.


A blizzard of grim data has soured the mood, capped yesterday by a plunge in PMI purchasing managers' index to an all-time low of 40.9. Car sales fell 28pc in March, and even Madrid's legendary tapas bars seem to have lost their late-night sparkle.

Inmobiliaria Colonial - once the country's biggest property group --is in emergency talks with banks after Dubai's Investment Corporation pulled out of a rescue deal.

Developer Martinsa Fadesa is struggling to restructure €5bn of debt to stave off insolvency.

Traders says the market price for Spanish mortgage securities has begun to slide abruptly, replicating the pattern seen in the US last year. Large French and German funds and insurers appear to be liqudiating assets in a pre-emptive move, afraid being caught yet again in a violent downturn.

Ismael Clemente, head of Deutsche Bank's property arm RREEF in Spain, told a panel of experts in Madrid that foreign banks were now dumping Spansih mortgaged debt at a 40pc discount.

Mikel Echavarren, director of the property consultancy Irea, said Spain's housing market was far weaker than the official statitics suggest, warning that prices could fall 20pc to 25pc.

"All kinds of ploys have been used to disguise the true extent of the price falls, which we think are 5pc to 7pc already. Buyers have totally abandoned the market. We've had a wave of negative sales as people pull out of commitments already made," he said.

"We have a very worrying situation. The developers simply cannot refinance their debts. We need to cut interest rates by 2pc, which is obviously not going to happen," he said, adding that the crash could be sharper than the property crisis in the early 1990s.

Santiago Baena, head of Spain's estate agents lobby API, said the downturn had already forced 40,000 agents to close their doors, laying off 120,000 staff.

The Bank of Spain said default rates would rise but insisted that the Spanish banking system remains in good health, without much exposure to the US subprime debacle. The loan-to-value ratio on mortgages was kept to 70pc - although a report in Germany's Die Welt newspaper today alleges that false pricing was often used to circumvent the rule.

The authorities said that a crisis comparable to the early 1990s (when bad debts reached 13.1pc) would erode the capital base of the banking system by 63pc, a manageable level. The developers owe €290bn to the banks and lenders, known as'cajas".

The government is preparing a €20bn spending blitz on high speed railways and other mega-projects to cushion the downturn. Spain's trump card is a budget surplus of 2pc of GDP last year, leaving in ample scope for fiscal stimulus - in sharp contrast to Italy, France, and Britain.

The root cause of the crisis is in a sense Europe's monetary union. The euro effect halved Spain's interest rates almost overnight. Rates then fell below Spain's inflation rate for several years, fuelling an explosive credit boom. The country's current account deficit has reached 10pc of GDP, the highest of any major economy.

The process has now kicked into reverse. Mortgage rates - priced off three-month Euribor - have nearly doubled since late 2005.

David Owen, Europe economists at Drsedner Kleinwort, said Spain was waking up to the reality that there will be no quick-fix. "They are no longer arguing about whether there will be a recessoin, but about how deep it will be," he said.

"Spain is no longer able to set monteary policy for its own needs. It could face zero-growth for five years," he said.

ABC newspaper reported that the Bank of Spain rushed its Financial Stability Report into print two months early in order to refute "tendentious" claims in the British media that Spain's banks had become reliant on emergency funding from the ECB after the capital markets seized up.

The banks have been issuing mortgage bonds on a large scale to use a collateral at the ECB's lending indow, raising concerns that they are becoming dependent on taxpayer funding. The Bank of Spain said they had borrowed €44bn from the ECB, insisting that this was "fully consistent" with EU rules.

The ECB said its latest €25bn auction of six-month funding this week was heavily over-subscribed, with €103bn of bids from 177 banks at rates as high as 4.88 pc. It did not reveal how much of the bidding came from Spain.

Deutsche Bank expects house prices to fall 8pc this year as the market struggles to clear a glut of unsold homes. Construction peaked in 2006 when last year when 740,000 new housing units were built - more than in Germany and Britain combined.

Standard & Poor's said Spain risked a "major collapse" in construction after a 40pc fall in housing permits. Building has accounted on a fifth of all jobs created in Spain since 2000. It said the country faced a "major and likely painful adjstment".

Re:Spain risks crisis over vanishing reserves 8 Anni, 6 Mesi fa #1439

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Spain's downward spiral spooks bond investors

Daily Telegraph, 03 Feb 2009

The ferocity of the downturn has led to a sharp jump in borrowing costs for the Spanish state, which lost its AAA credit rating from Standard & Poor's last month.

A €7bn treasury auction of 10-year Spanish bond on Tuesday saw yields jump to 137 basis points above German Bunds, a post-EMU high. Foreign investors were conspicuously absent, leaving Spanish banks to soak up the debt.

"This is a national emergency. The government is being overwhelmed by events," said Mariano Rajoy, the opposition leader. The mood has changed dramatically in recent weeks as debtors launch hunger strikes and one builder threatened to set himself on fire to protest the credit crunch.

Maravillas Rojo, the labour secretary, said four million people may be out of work by end of the year – up from 3.3m now. "We're suffering from a grave international financial crisis, lack of liquidity, and falling consumption," she said.

Spain is losing jobs at three times the rate of the US, in proportionate terms. Over one million Spanish men under thirty are unemployed, leading to a surge in applications to join the armed forces. Three quarters of the army candidates are being turned away.

Industry minister Miguel Sebastian has launched a "Made in Spain" drive, exhorting the nation to buy Spanish clothes and to take ski holidays in the Sierra Nevada instead of the Alps. He claimed that 120,000 jobs can be saved if every citizen spends €150 less this year on imports.

The campaign amounts to a partial boycott of foreign products and may breach EU law. It is the sort of protectionist reflex becoming visible daily in much of the world.

Mr Sebastian blamed the banks for causing the crisis by tightening credit. "We're losing our patience," he said.

But the banks themselves are coming under strain – even though they have held up better than Anglo-Saxon and German banks so far. Bad loans have reached 3.5pc and are expected to surpass the 8pc peak seen in the crunch of the early 1990s.

"Banks have closed the tap," said Jesus Barcenas, Spain's small business leader.

Finance minister Pedro Solbes says there is almost nothing Madrid can do to halt the downward spiral. "We have exhausted our margin for manoeuvre," he said.

While he has avoided blaming Spain's euro membership for the country's plight, there is no question that Spain's failure to adapt to the rigours of EMU is at the root of its structural crisis.

S&P said euro membership had become part of the problem since it prevented the country resorting to aggressive monetary stimulus to counter the housing crash, or from devaluing to restore competitiveness.

Spain has become trapped after letting wage costs rise faster than German and French costs for year after year, leading to a current account deficit of 10pc of GDP. The socialist government of Jose-Luis Zapatero has so far recoiled from imposing the necessary remedy of wage deflation. It may be forced to do so by the bond markets.
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