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BoG recently released its November 2012 financial statement.


Regular refinancing operations were even lower in November, registering at €5.6bn (compared to €6.52bn during October). The fall is mainly attributed to lower MRO lending towards credit institutions. A large part of the fall reflected an increase in ELA which increased €0.5bn to a total of €123.3bn (more than 60% the projected 2012 GDP). Nevertheless, posted collateral (not including collateral covering regular operations) fell from €246.64bn to €245bn which should reflect higher prices in certain bank assets such as the post-PSI bonds.


Bank reserves increased during November from €1.77bn to €2.35bn (current accounts + deposit facility). This should be attributed to lower demand for banknotes which brought the 9.2 figure down to €15.04bn (from €15.49bn). The general government account was lower at €3.36bn (from €4.32bn in October) while Target2 liabilities were roughly unchanged at €108.46bn.

It seems that still only resident developments are having an impact on BoG balance sheet, with banknotes being the primary factor (after a large increase during the summer elections). Greece remains decoupled from the developments in the rest of the periphery where Target2 liabilities have fallen significantly due to a return of foreign capital.

The December bond buyback should have a large impact on the BoG balance sheet since banks will replace ELA financing (collateralized by Greek government bonds) with regular financing (collateralized by EFSF Bills). The ECB should also accept Greek government guaranteed securities in its operations again which should push ELA much lower and allow Greek banks to refinance at lower costs. A €1bn fall in ELA should provide an annual reduction of close to €20mn in financing costs. In the short-term, this reduction will be reflected in the remaining weekly ECB financial statements.

From a trading perspective, it is highly possible that future Greek T-Bill auctions will achieve lower rates.

The ECB released its Euro money market survey for 2012. The observations are quite interesting. Both the unsecured and secured money market daily turnover is lower in 2012.

The unsecured market structure has changed in 2012 with trades moving mainly at the national level while intra-euro lending dropped significantly:


while market participants do not regard the market as efficient and liquid:


The secured market structure on the other has held tight:


probably because trades are moving through central counterparties, thus limiting exposure for lenders:


Another factor is the fact that maturities are shorter, both in the overall market:


and the bilateral repos (which consist the largest part of the market):


When one takes a look at the total market structure it’s obvious that both the secured and unsecured market is dominated by the top 20 credit institutions:


As a result, developments such as the fall in intra-euro unsecured lending should not be considered marginal but significant, since most of the remaining trades are probably accounted for by these top-20 institutions and do not change much.

BdE released data on doubtful loans for June 2012. They posted a very large increase of €8.4bn to €164.4bn (9,42% of total loans). Total loans increased by about €3bn, driven by repos (+€7.2bn) and ‘Debts repayable on demand’ (+€7.55bn). Mortgage loans decreased significantly by €11.4bn (more than 1% of GDP) to €948.3bn while other fixed-term loans by about €1bn to €480.34bn. Deleveraging (especially in the housing sector) now appears to be going full speed with the results visible on bank balance sheets.

Taking a look at the equity side of credit institutions, we see that net profits were an impressive -€10.54bn in June, while impairment allowances increased by €21.68bn to €148.75bn. The ‘capital and endowment fund’ increased by €3.51bn to €59.24bn while reserves stayed roughly steady at €170.62bn. The troubled state of the Spanish banking sector is clearly visible and the path of the doubtful loans figures is worrying.

The central bank also provided statistics on bank deposits. Overall, they maintained their general level although there were some interesting developments. RoW continued its exodus with balances dropping €22.93bn to €406.59bn. The outflow was more than matched by domestic lending (‘Credit system’) which grew by €59.77bn to €614.67bn (balances were lower than €320bn up until November 2011 when RoW deposits were €508.6bn, an outflow of more than €100bn). The move to domestic financing of the banking sector (financed by BdE lending) is quite evident. ‘Securities other than shares’ decreased further by €13.2bn to €410.7bn, a path they ‘ve maintained throughout 2012.

What is worrying is the fact that government deposits dropped €11.5bn to €68.6bn. Coupled with the lower government deposit balance at the BdE, total government deposits were €75.9bn in June, a figure not seen since December 2011. Based on these figures i maintain my projection that the Spanish government will be able to cover its financing needs until the next round of large bond issuance in October. Nevertheless, the current financial position makes an official bailout more likely since the government is running low in liquid financial assets.

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:


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.


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.

ECB released its weekly statement for the week ending on 29 June.

Asset Side

On the asset side, weekly USD liquidity-providing operations increased from $1.6bn to $2.6bn (+$1bn), continuing the trend of growth in USD swap usage. Lending to credit institutions increased by €20.3bn through a larger MRO of €180.4bn as well as an increase in LTRO (+€8.2bn). ‘Other Claims’ (ELA) did not post any significant change which is a sign of stabilization.

Liabilities Side

Bank reserves increased by €21.5bn, mainly due to a large decrease in current accounts (€19.6bn). What is quite worrying is the fact that ‘Deposits related to margin calls’ increased by almost €4.3bn, which means that assets posted as collateral in ECB liquidity operations lost value. It will be interesting to see if this change is permanent or reverses course after the positive results of last week’s Euro summit. General government accounts decreased €4.3bn.

A very positive development was the fact that ‘Liabilities to non-euro area residents’ were stable last week, which means that (especially accounting for increased USD swap usage) there actually were some net euro inflows after a long time.


This week’s MRO was lower than the maturing one (at €163.6bn, down €16.8bn from €180.4bn). Since the reserve maintenance period ends on 10 July and average current account holdings were around to €118.5bn (compared with a reserve requirement of €106.9bn), it is possible that the latest lower MRO bid is related with lower needs for reserve requirements and will be reflected in lower current account holdings (they were €95.9bn today). Still, total liquidity is higher today (deposit facility + current accounts + fixed term deposits) at €1112.9bn, compared to €1100bn in the financial statement, which might suggest funds movement from government accounts.

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.

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Kostas Kalevras

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