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Saturday, June 30, 2012 12:58 PM

Headline in Spain: Government 'sacrificed' Bank of Spain in Exchange for Financial Sector Bailout; ESM Agreement Raises More Questions Than Answers

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In the wake of a huge market reaction on Friday, it's interesting to see how the headlines read other places, especially Spain.

Here is one such viewpoint by El Confidencial: Government 'sacrificed' Bank of Spain in Exchange for Financial Sector Bailout

The clearest conclusion to the European Agreement made by Spain and Italy is that our government has preferred to sacrifice the sovereignty of the banking supervision enjoyed by the Bank of Spain in exchange for the bailout of the sector does not compute as debt or deficit and that The European rescue fund to buy Spanish debt when things get as ugly as this week. However, many unknowns are open, including the timing of the operation. Therefore, the FROB who will initially inject capital to entities that need it in September, with funds from European loan subsequently permutarán MEDE the money.

"The government has chosen to advance the loss of competition in banking supervision, it was inevitable sooner or later if you go to a European Banking Union in exchange for breaking the feedback loop between the banking and public debt, which is very positive and not only for Spain, "says an analyst.

Officials of both Economy and the Bank of Spain claimed yesterday that has not yet been defined how will such a monitoring mechanism or what the status of the former Central Bank. Some sources believe that it is logical that national central banks are the arms of the central agency in each country and to continue in office today, but accountable to a higher power who will make the final decisions.

Other experts, such as Eurointelligence, say that "it is far from clear that Germany is willing to give up their own banks to supervision by the ECB." It is also unclear what will happen to insurance, which can not be monitored by the ECB according to the EU Treaty. Or if the conditions to be imposed in order to use the European Stability Mechanism (MEDE), conditions that likely will go beyond the financial sector despite yesterday again denying Mariano Rajoy.

A major uncertainty centers on the period within which this new monitoring system will come into force, which is the condition for the MEDE to inject money directly to banks. In principle, the idea is to reach an agreement in October to put in place before year end. But "it is unrealistic to expect an agreement by October? MEDE himself was delayed. The EU has consistently been too optimistic on the timing," adds the analyst firm.

The terms do not match

And although respected, there is an inconsistency between this term and timing of the rescue plan by Spain. This includes the signing of the memorandum with the conditions for the sector on 9 July, the end of the audit work in each state on July 31 and defining the specific needs of each in September, when performing the new stress test bottom-up (bottom up). Thereafter, viable entities that need capital will have nine months to get their media, and immediately nonviable may receive the loan proceeds Europe.

Therefore, various sources claim that the FROB will perform the first injection of capital until the conditions for you to do the MEDE. So initially counted as debt itself. So then have to do a swap between the FROB and MEDE. Another option is to wait until the system is willing, but the markets probably will not have much patience, and as mentioned, is likely to be delayed.

A priori, it seems very complicated to start with the FROB and replaced by MEDE, but the text of the Declaration of the Summit opened the door this way, referring to Ireland: "The Eurogroup will review the status of the Irish financial sector with a view to further improving the sustainability of the adjustment program is working well. Similar cases are treated in the same way. " That similar case would be Spain.
ESM Agreement Raises More Questions Than Answers

The above article certainly raises a lot of questions. Gavyn Davies at the Financial Times also says More questions than answers after the summit
In the wake of yet another summit, we need to ask our usual question: is this the eurozone’s game changer?

My fear is that, as so often in the past, the devil will prove to be in the detail. The more carefully one examines the text of the statement, the more questions are raised about how the proposed measures will actually work.

In particular, it is debatable whether there are any terms for direct eurozone recapitalisation of Spanish banks which will be acceptable both to the Spanish government and to the German Bundestag. (The latter will be empowered to “monitor” the new arrangement, according to Mrs Merkel’s spokesman.) And the shortage of remaining funds in the EFSF/ESM, which I discussed here last week, has certainly not been solved.

1. Direct bank recapitalisation by the ESM

This is clearly the critical new development which potentially allows the costs of recapitalising troubled banks to fall on the eurozone as a whole, rather than on an individual sovereign country. It could therefore represent a very large step towards debt mutualisation, and it directly addresses the point which the markets so disliked in the Spanish bank deal two weeks ago. The statement says that this can only be done after the eurozone’s new bank supervisor is “established”, and that this should only be “considered” by the Council before the end of the year. ... I suspect that Germany will be quite demanding is setting these terms. Otherwise, there could be great problems with the constitutional court in Karlsruhe. ...

3. ESM support for the Spanish and Italian bond markets

The final paragraph of the statement gives the strong impression that the ESM will in future be able to stabilise these bond markets in a “flexible and efficient” manner. This appears to be a major victory for Mario Monti, but actually it does not contain anything really different from the status quo.

4. The availability of funds for the ES

German Finance Minister Schauble emphatically said yesterday to the Wall Street Journal that there would be no increase in the size of the ESM, and that position has been maintained by Germany at the summit. Furthermore, Mrs Merkel has repeatedly stated that there will be no “joint financing” of eurozone debt (ie eurobonds, or eurobills) before full fiscal union has taken effect. Again, there is no change in that position. Indeed, that is the basis for the German government’s insistence that they have not taken on any extra “joint liabilities” as a result of this summit.

In summary, the summit has given the ESM some new tasks, but no new money with which to discharge these tasks. And many details are obscure.
Mike "Mish" Shedlock
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