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Friday, April 13, 2012 1:13 PM

Massive Jump in Bank of Spain Borrowing from ECB: Bank of Spain Balance Sheet Shows Spain Deep in Trouble, LTRO is Essentially Useless

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CDS rates to protect against default by Spain rose to an all-time high today as Investors brace for more pain in Spain.

Spain was firmly back in the spotlight on Friday, after news of a sharp rise in borrowing by the region’s banks from the European Central Bank triggered losses across European stocks, but especially for the IBEX 35 index XX:IBEX -3.58% , which fell more than 3% to a three-year low.

The yield on the 10-year government bond in Spain ES:10YR_ESP +0.0004% , which had appeared to get some relief in the latter half of the week, resumed a climb upward, rising 15 basis points to around 5.93%.

The cost of insuring Spanish government debt against default using credit-default swaps, or CDS, rose to an all-time high. The five-year Spanish CDS spread widened to 505 basis points from 476 basis points on Thursday, according to data provider Markit.

That means it would now cost $505,000 annually to insure $10 million of Spanish government debt against default for five years.

Data released by the Bank of Spain showed gross borrowing from the central bank hit 316.3 billion euros ($416.7 billion) in March, up from €169.86 billion in February.
Massive Jump in Bank of Spain Borrowing from ECB

Inquiring minds are digging into Consolidated Balance Sheet of the ECB and by the Bank of Spain, searching for clues about the LTRO program for the entire Eurozone and also for Spain in isolation.

Consolidated Balance Sheet of Eurosystem
Net Lending to Credit Institutions

click on chart for sharper image

During March alone, the LTRO expanded by 433.236 billion but main refinance operations shrank by 87.821 billion. In March alone, 301.424 billion was parked right back with the ECB.

Please consider Spain.

Consolidated Balance Sheet of Banco De Espana

click on chart for sharper image

ECB system-wide lending in March went up by 39.690 billion euros.
ECB lending to Bank of Spain alone jumped by 75.168 billion euros.

Thus, lending shrank by 35.478 billion euros elsewhere. What did Spanish banks do with the money? They parked it in sovereign bonds are now underwater on the purchases.

If you were looking for specific details as to why CDS rates for Spain hit an all-time high, there you have it.

Will There Be A ‘Corralito’ in Spain?

In response to Black Market in Spain: Cash Transactions Exceeding 2,500 Euros Now Banned, Gonzalo Lira pinged me with Will There Be A ‘Corralito’ in Spain?
The “corralito” (“little bullpen”) was when the Argentine government limited weekly transactions to AR$250 a week back in 2001.

In my piece, I argue that a “corralito” would be part of a Spanish withdrawal from the eurozone—and on cue, Rajoy is on the road to implementing it.

There is no solution to the Spanish problem except EMU exit and devaluation.
Lira's target date for Spain exit from Eurozone this year is certainly debatable, but economically-speaking it is bound to happen as the current setup is extremely unstable and worsening every day.

Mike "Mish" Shedlock
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