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Bank of Spain released its balance sheet data for August:
Lending to credit institutions increased during August as well, by €9.47bn, using both MROs and LTROs. This lending was used to finance outflows since Target2 liabilities increased by €14bn to €428.62bn (more than 40% of GDP). The increase in external liabilities was also financed by a further drop in the deposit facility of €3.72bn, while government deposits grew somewhat to €6.42bn (+€1.1bn). All in all, although the growth rate in T2 liabilities clearly slowed, outflows continued, increasing financing difficulties for Spanish banks. It is no coincidence that BdE activated ELA financing on a limited basis. We ‘ll see if the recent OMT bull market resulted in net inflows in Spain during September.
BdE also released data on government debt based on the excessive deficit procedure. Government debt is now 75.9% of GDP (compared to 69.2% at the end of 2011). The increase is attributed to long-term loans which increased from €114.67bn to €148.78bn (+€34.11bn) in one quarter. These loans were taken mainly by ‘Other units classified as central government’ as is evident in the corresponding table. Debt will most probably register over 80% by the end of the year, while taking into account the €100bn EFSF loan and other debts (such as public enterprises and unpaid bills) it will be close to the 100% mark.
On a related development, home prices fell 3.3% on a quarterly basis and 14.4% from a year earlier.
Update: ftalphaville has a very nice analysis on Spanish deposit flight. Worth a read.
Today, Bank of Spain released its balance sheet data for July which point to continued growth in its lending to domestic credit institutions and target2 liabilities. More specifically:
Assets
MROs increased significantly, from €45bn to €69.34bn while LTROs also posted an increase of €12.8bn, from €320bn to €332.85bn. In total, lending to credit institutions is now €402.2bn.
Liabilities
The larger growth came from Target2 liabilities, which grew €42.81bn, to €414.62bn (more than 38.5% of GDP), pointing to a continued capital flight out of Spain with Target2 liabilities still being larger than total bank lending. Banknotes increased somewhat by €1.5bn to €71.6bn, while general government deposits decreased further to just €5.3bn, a figure that has not been registered during 2011-2012. The deposit facility decreased a bit in July as well to €26.64bn (a drop of €1.15bn) while the reserve accounts increased by only €0.5bn. The Spanish banks safety buffer is now only limited to the funds in the deposit facility. Net Other Assets kept their steady decline during 2012, registering at €79.84bn in July.
What is interesting is the fact that while the increase in Target2 liabilities was €42.8bn, new net lending from BdE was €37.2bn with entries such as government deposits and the deposit facility used to also fund the outflows. As stated before, this pattern of €40-50bn outflows per month is not sustainable and coupled with the difficult government financial situation points to some sort of development in September.
The BdE (central bank of Spain) released data on the balance of payments till May 2012 today. The current account developments are actually quite positive:
Both the goods and services balance have improved significantly with the general current account deficit (Jan- May) shrinking from €23.25bn in 2011 to €16.88bn in 2012 or around 1.6% of GDP. Given the current macro situation (shrinking domestic demand and wages), a yearly current account deficit of no more than 3% GDP is quite possible, levels that were not seen since the introduction of the Euro.
What is very worrying on the other hand is the financial account deficit:
Excluding BdE this one exploded from net positive €14.6bn in 2011 to -€163.2bn in 2012. Extrapolating the results, the yearly deficit might reach €350-400bn or 32-37% of GDP, a capital flight visible only in the most severe foreign exchange crises. Looking into the data, direct investment is still positive (€6.7bn) while portfolio investment is negative €65.5bn and other investment negative €108.9bn. Portfolio investment is related with shares and bonds while other investment with direct loans. The table below provides more detailed information on investment in Spain:
It is clear that:
- Portfolio investment in MFIs is highly negative since February.
- Portfolio investment in General Government (securities) was negative till April (with very large flows) but somewhat positive in May. If that is a structural change remains an open question.
- Other investment in MFIs shows very large outflows which should probably be attributed to a large drop in loans (with MFIs having €446.82bn in foreign deposits in 2012Q1).
- General government managed to maintain positive flows in the other investment category (although its loans were only €39.9bn in 2012Q1). Other resident sectors did not show any large changes.
The data are mixed in the case of Spanish investment abroad:
What mainly stands out is Other Investment with large outflows to MFIs. If the financial accounts of RoW for 2012Q1 are any guide (when Other investment abroad from Spain to MFIs was a bit more than €29bn) net issuance of liabilities was mostly towards MFIs (€29bn) while sectors such as non-financial corporations and households (which could have moved deposits abroad) were actually negative.
Bank of Spain released its data on doubtful loans for May. They increased by € 3.1bn to €155.84bn. It seems that doubtful loans are growing around €3bn each month. If this trend continues, they will be more than €20bn higher by the end of 2012 which will probably lead to an equivalent capital injection to Spanish banks.
Household deleveraging is also evident from BdE data. Mortgage loans dropped €6.4bn in May to €959.8bn and were the main driver of the drop in total loans (down €10.3bn to a total of €1740.6bn). The deleveraging rate is now almost 1% of GDP, which is close to 12% annualized. Coupled with the large capital flight annualized rate of close to 50% one can only conclude that Spain is heading for a large wall.
The above is also evident in the impairment allowances, which increased €11.65bn in May. Banks equity position is starting to fall significantly due to large drops in reserves (down €13.27bn) while net profits are still marginally negative.
On Friday, Bank of Spain released its balance sheet data for June which point to large growth in its lending to domestic credit institutions and target liabilities. More specifically:
Assets
MROs increased significantly, from €9.2bn to €45bn while LTROs also posted an increase of a bit less than €5bn, from €315.4bn to €320bn. In total, lending to credit institutions is now €365bn.
Liabilities
The larger growth came from Target2 liabilities, which grew €53.2bn, to €371.8bn (almost 35% of GDP), pointing to a continued capital flight out of Spain. Ever since the second 3Y-LTRO, it’s the first time that Target2 liabilities are more than total bank lending from BdE. Banknotes increased somewhat by €3bn to €70bn, while general government deposits decreased further to only €7.3bn. Coupled with the fact that the deposit facility balance kept falling, with June registering a €27.8bn balance, it is clear that the 3Y-LTRO effect for Spain is now officially over and Spanish banks need to access central bank liquidity (especially short-term through MRO) in order to cover their increased liabilities. Net Other Assets kept their steady decline during 2012, registering at €81.85bn in June.
Actually, if one examines the increased liabilities due to Target2 and banknotes and subtracts new lending from BdE and the drop in the general government accounts, there’s still a bit less than €10bn that was needed to cover outflows, with deposit facility balances being used for that. This could be a sign of banks running out of collateral, especially since the ECB will not accept government guaranteed bank bonds in its liquidity operations any more. I ‘m not sure that Spanish banks will be able to withstand such volumes of outflows for a long time. Target2 liabilities costs will also make it harder for Spanish banks to make reasonable bids in Spanish government securities auctions since their negatve RoW position plays a role in their cost of funds.
The graph below shows the evolution of both the Target2 liabilities and deposit facility balance since August 2011. The fit of the exponential trendline is quite impressive. Projecting the fit to December 2012 points to a negative balance close to €1.1tr. I think it is clear that the current path is quite unsustainable.
Bank of Spain released ([1],[2]) May data on financing to the private sector. A couple of quick observations:
- Household mortgage lending deleveraging continued in May, with housing loans dropping a further 1.8bn to 656.8bn. Total lending was slightly more positive because ‘other lending’ actually increased by 0.6bn to 194.7bn.
- Non-financial corporations loans dropped significantly, with the loans category decreasing by almost 6bn (more than 0.5% of GDP) to 819.6bn, with the rest of categories (securities, external loans) posting small increases.
Overall, the housing market is still in strong correction mode while the real sector (non-financial corporations) is showing a large contraction (most probably in investment) which should be reflected in GDP data shortly.
Bank of Spain released details on private credit and doubtful loans developments for May. According to the data:
- Total lending dropped to €1750.9bn, down €17.6bn from March, signaling a significant deterioration of credit demand. A detailed analysis shows that mortgage credit registered a decrease of €9bn to €966.2bn (a development which can only be bearish for the house market) while repos posted a large drop to €39.9bn (from €51.2bn in March). In general, the mortgage and repo markets show clear signs of accelerating deterioration in April.
- Doubtful loans increased to €152.7bn, a change of €4,8bn from March. Overall, doubtful credit is now over 14.3% of GDP and does not show any signs of stabilizing.
The central bank also released data on the equity side of bank balance sheets. Net profits turned negative in April while Valuation Adjustments were – €7.1bn, strengthening a negative trend in 2012 (up from – €3.8bn in March). Impairment allowances kept their increasing path, at €115.4bn (from €113.1bn in March). Negative GDP growth, stressed interbank financing conditions and negative credit growth/demand clearly increase the risk of maintaining a negative net profit position for credit institutions. This will make increasing impairment allowances more difficult and require assistance from the Spanish state. Based on the gap between doubtful loans and impairment allowances the €40bn assistance is the bare minimum. If net profits and doubtful loans keep their current trajectory a capital injection of more than €80bn seems quite possible.
Bank of Spain released its balance sheet for May today. The basic observations are as follows:
- Target2 liabilities continued to increase growing to €318.6bn, a change of €34bn in a month. On the other hand, the deposit facility dropped further to €36.8bn.
- Lending from the ECB increased in May through the MROs (which closed at €9.2bn compared to €1.8bn in April) while the LTRO remained unchanged.
- Government deposits dropped from their high level of €24bn to €11.2bn.
Overall it is clear that capital flight is steady at around €30bn/month. Spanish banks excess liquidity (acquired through the 3Y-LTROs) has dropped to alarming levels, while the MRO borrowing shows that the banking system is already facing liquidity problems. Furthermore, the government deposit position is now low and cannot function as a balancing factor.
If this level of capital flight continues in June as well, Spanish banks will need to use short-term MRO lending from the ECB to cover the liquidity leakage. Bank of Spain daily interbank rate statistics point to very limited and expensive (especially compared to eurepo rates) access to interbank lending and only in very short maturities (overnight for unsecured lending, one month for repo loans). The recent increases in MRO usage visible in ECB’s weekly statements might be a result of Spanish banks lending.
As far as the Spanish banking system is concerned, a third 3Y-LTRO is quite needed by now.
On the Italian front, Bank of Italy released data on Italian debt. Table 5 contains details of holdings of securities by sector:
Although the data does not contain the most recent monthly details for all categories it is quite evident that, especially after the 3Y-LTROs, domestic MFIs were the main buyers of government securities, coupled with other financial (Other residents did the same in the second half of 2011). On the other hand non residents continued their exodus from Italian debt which amounted to €95.8bn during 2011 and another €24.6bn in the start of 2012.
Unfortunately, data for non residents only reaches February but an extrapolation clearly shows that resident MFIs/financials probably only managed to match outflows from non residents. Judging from the recent increase in Italian yields they aren’t successful any more.
Overall, the data point to a stressed environment but they aren’t recent enough to draw clear conclusions.
Today, Bank of Spain released its balance sheet data for April. My main observations are:
- There was no meaningful resort to new net lending from Spanish banks during April.
- Target2 liabilities increased by €32.4bn while reserves held at the deposit facility decreased by €35.3bn. In general, it seems that Spanish banks ‘financed’ outflows to the rest of the Eurosystem by decreasing their deposit holdings.
- General government deposits maintained their strength, remaining at around €24bn (since January they have increased from €5.8bn to €10bn on February and €24.8bn on March).
In general, i maintain my previous projection that Spanish banks will face serious liquidity needs in the summer which will be reflected on the Spanish government finance. Large government deposits do provide a safety buffer.
On a related subject, today’s Spanish T-Bill auctions went rather awful. 12-month bills yield settled at 2.985% (compared to 2.623% at 17 April last auction), while 18-month yield closed at 3.302% (last 3.110%). The yield curve for Spanish debt seems to be ‘inverting’ on short-term debt (in the sense of short-term zero rates increasing much more than long-term rates and driving the latter), especially compared with current yields on AAA securities. The following yield curve from ECB better illustrates this point:
Personally, i cannot see a way out for ECB apart from engaging into a large enough QE for Spanish and Italian debt, probably combined with a recapitalization scheme for Spanish banks financed by the EFSF.
The situation is quite obvious in the following chart where the latest Treasury auction results are charted against Eurepo rates (for maturities up to one year) and Dutch bonds (for maturities over one year), which i think represent the ‘risk-free’ yield curve better than German bunds (which carry a safe haven/liquidity premium):
The market is clearly projecting an event in the following 3 years, with the likelihood of it happening within a year quite elevated.
ftalplaville posted on Bank of Spain data about Spanish private lonas:
What is quite obvious from the data is that deleveraging went into full speed in 2011 with loans dropping €61.5bn in 2011 (and €19.2bn in the first two months of 2012), with most of the drop coming from mortgage loans which lost €60.6bn. Also doubtful loans went from €107.2bn to €143.8bn in February (or 8.16% of total).
If one compares the above numbers with 2011 GDP, the result is that loan contraction was equal to 5.7% and averaged €5-6bn per month or around 0.5% of GDP, while doubtful loans are equal to 13.4% of GDP. Given the large austerity push for 2012 (which will only leave a weak external sector to provide for positive demand growth), these numbers suggest a deep recession for this year and much higher capital needs for Spanish banks (which will eventually need to be covered by the Spanish state, increasing its debt/GDP ratio).
On a related note, zerohedge posted an informative 2012 calendar of sovereign bond issuance. July seems very crowded.
Economy View 