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Since it’s been a few months since I took a look at periphery NCB balance sheets, it’s time to examine trends during 2013.


Spain seems to be the one driving overall Open Market Operations (OMOs) usage down:

BDE balance sheet Mar 2013

Since December, OMOs have declined from €357.29bn to €270.94bn (-€86.35bn) with 80% attributed to a fall in LTRO usage. It seems that Spanish banks are confident to repay a significant part of their LTRO borrowing from the ECB which, given the low interest rates of LTRO funding and the relaxed collateral rules, imply that market conditions have improved strongly. During the same period, the consolidated Eurosystem OMO funding to European banks has dropped €225bn which means that Spanish banks account for almost 40% of the relevant fall (with another large part accounted by French and German banks).

Looking into the balance sheet at more detail, one observes that use of the deposit facility was €44.2bn in December and only €10.94bn during March, reflecting much lower safety buffers for Spanish banks. This is linked to the drop in Target2 liabilities, from €352,4bn in December to €298.3bn in March (-€54.1bn). Still, liabilities continue to be high, almost 28% of Spanish GDP although they are much lower than their maximum of €428.6bn in August 2012 (a fall of €130.3bn).

The drop in Target2 liabilities is related to the increase in non-residents government debt securities holdings, with registered holdings increasing €30bn since October, from €209.6bn to €240.4bn in February (an almost 15% increase).

Overall, credit conditions have clearly eased during the last few months. Nevertheless, both the situation in the real economy and current NPL figures point to large risks ahead for the Spanish banking system. Spanish banks will probably keep low quality collateral (such as credit claims) parked at the ECB and only use high quality securities in order to borrow in the repo market at low interest rates   (since current repo rates are close to 0.02-0.03%).


The Italian case seems to be a bit more muted than Spain. Since December, bank borrowing from the central bank of Italy has dropped only marginally from €271.8bn to €268.2bn with a somewhat larger fall in LTRO usage from €268.3bn to €262bn. This is mainly explained from the fact that Target liabilities only dropped from €255.1bn to €242.9bn. It seems that Italy has decoupled from Spain, probably due to the results of the recent national elections and the inability to form a stable government as well as the fact that government debt figures are moving close to the 130% GDP figure.

This is also reflected on the general government debt statistics which illustrate the fact that non-residents holdings of securities have been extremely steady during the last few months and are much lower than 2011 figures.

The BdE released its balance sheet data for December yesterday. There’s a significant drop in Target2 liabilities to €352.4bn (from €376.3bn in November). Overall, since a peak of €428.62bn in August, liabilities have dropped by €76.22bn, reversing private capital flows (mainly driven by the ‘Draghi-OMT effect’). As a result, Spanish banks managed to create a large deposit facility buffer of €44.2bn (from €24bn in November) and also to reduce their recourse to regular refinancing operations by €7.6bn to a total of €357.3bn. Banknotes and deposits of general government were somewhat lower during this month.

Spanish banks don’t seem to regard the current situation as perfectly stable, something evident from the fact that they increased their deposit facility holdings substantially even though excess reserves pay zero interest (and did not opt to pay down more of their borrowing from BdE). This indicates fear of a possible price shock on their main collateral (government bonds) which would increase their margins with BdE and risk current private capital inflows. Nevertheless, the fact that private financial flows have clearly reversed and the current account deficit has been closing and is now less than -€1bn/month makes the Spanish economy a rather ‘closed’ one. Lower money market and deposit rates as well as the large deposit facility buffer will be supportive of government debt auctions in the near future (although it is possible that the Spanish government might take the route taken during the first months of 2012 when the LTRO effect allowed it to auction off more funds than immediately required and increase its deposits at Bde – something that would lower the Spanish banks safety liquidity buffer).

BdE published the balance of payments for September 2012 (and 2012Q3). Developments are quite positive. Regarding the current account:

Spain current account sep 2012


The goods balance is now firmly below the -€3bn/month threshold. Compared to -€31bn in the Jan – Sep 2011 period, the balance was -€22,13bn. It’s quite positive that most of the improvement is attributed to larger goods exports (+€5.7bn to €170.52bn) than lower imports (-€3.2bn to €192.65bn). The balance in services was also improved by €3.45bn. Total goods and services balance is now +8.17bn compared to -4.15bn a year ago.

A very large improvement came from the income balance which registered at -€16.61bn, down €2.7bn from last year. After growing to more than -€3.1bn during July, the balance dropped below -€1bn during August and September most probably driven by the ‘ECB effect’.

Current transfers were -€8.07bn compared to -€6.84bn in J-S 2011 and the capital account was €3.92bn after €4.17bn a year ago. Overall, the current+capital account deficit is now mainly driven by the income deficit.

Spain financial account sep 2012


The financial account was also quite positive during September. Portfolio investment turned strongly positive during September (+€9.75bn after a +€2.34bn in August and -€10.82bn in July), a strong display of ECB ‘powers of persuasion’. Large inflows were registered in the general government category while ‘other sectors’ also had a positive balance after a long time (+€3.34bn after -€2.78bn in August) and MFI outflows continued dropping with September reading below -€2bn.

The largest change was in the other investment balance where investment on MFIs went from -€21.52bn during August to €4.93bn in September, marking the return of Spanish banks in the Euro interbank market.

External adjustment is definitely making progress in the case of Spain (with exports showing healthy increase) while ECB actions allowed for a complete U-turn on capital outflows. How long the ECB effect will last is an open question.

The BdE released the Spanish banks stress tests results on Friday. The total capital needs are expected to be a bit less than €60bn under the adverse scenario (cumulative 6.5% fall in GDP). Only banks with 37% of total bank assets are the ones with negative capital, with the rest not having any problems:

Actual capital needs will be even lower since banks will move assets to the ‘Bad Bank’ and the government will impose ‘burden sharing’ on hybrid and subordinated debt holders. Subordinated bonds are around €41.6bn while hybrid debt is €23.6bn. As a result, a large part of the capital relief can actually come from losses on such instruments. These losses and bank resolution are scheduled to be completed by the end of 2012.

RoW currently holds around €180bn in bonds and €408bn in deposits with MFIs so these steps will probably help in limiting any further capital outflows out of Spain, as long as the remaining bank liabilities are considered safe.

One problem of the stress tests (which was raised by zerohedge) is the fact that there’s a very important role played by the ‘capital buffer’. Total losses under the adverse scenario are projected at €270bn, with €110bn covered by existing provisions, €59bn by new profits and €36bn by the capital buffer (which is actually a total of€ 73bn):

The capital buffer is basically the result of bank deleveraging. Banks are expected to dispose of assets, thus lowering their risk adjusted capital needs. Still, the size of the capital buffer corresponds to an extreme asset disposal. Currently, Spanish MFIs hold a total of €3.6tr in assets. Their borrowing from BdE is already around €412bn while they also have €408bn in debt securities issued. How much of their €782bn deposits to MFIs is securitized is difficult to know but it’s obvious that a large part of their assets are already pledged as collateral. By disposing of assets banks will have to ackowledge any losses due to the difference between the booked value and the price they ‘ll manage to get at the market, losses that will lower their capital base and the final capital relief.

What is worrying is the fact that the capital buffer is actually very important even for banks that are considered to have excess capital. Santander has a capital excess of €25.3bn with €22.7bn in the capital buffer, while BBVA a capital excess of €11.2bn with €13.4bn in the capital buffer (under the adverse scenario). Caixabank & Banca Cívica have €5.7bn against €8.9bn, KutxaBank €2.2bn against€ 3.4bn, Sabadell & CAM €0.9bn against €4.7bn and Unicaja & CEISS €0.13 against €3.62bn. It’s rather strange that excess capital under the adverse scenatio is actually higher for the first two banks than under the baseline.

Overall, one should probably consider the capital buffer figures extremely optimistic. Actual capital needs might be even double the €60bn figure which will lead to large losses on hybrid and subordinated liabilities.

The Spanish government might end up with a fiscal safety buffer of €20-30bn out of the original €100bn EFSF loan which will help with covering its financial needs for the rest of 2012. Given that foreigners now only hold 1/3 of the total government debt and the Spanish Treasury held a bit less than €40bn in deposits in August i think that it’s a safe bet to suggest that it will be able to cover any bond redemptions for 2012. This fact might push any actual bailout into 2013, especially given important regional elections in the next few months.

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:


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.


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.

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:


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.

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.

The ECB released the MFI balance sheets for April:

Interesting parts are the following:

  • Repo liabilities have started to lose strength, particularly in the case of Spain, after a rebound since the ECB LTROs.
  • Spain lost more than €30bn in deposits in April (a bit less than 2% of total deposits).
  • Debt securities issued fell considerably both for Spain and Italy.
  • Government securities holdings fell in April, reversing a trend since November (which strengthened due to financing from the LTROs). Still, Spain’s net issuance was -€13.4bn during April so the Spanish numbers are not as negative as they seem. Nevertheless, April was a difficult month for Spanish Treasuries which probably meant that Spanish banks did not take advantage of carry trade opportunities that much:

Overall, banking sectors (especially Spain’s) are stressed, with capital flight starting to become evident. The LTRO effects seem to be over though, only two months after the second 3Y-LTRO.

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Kostas Kalevras

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