Is Spain Running Out Of Cash?

Some hours ago Spain finally bit the bullet, and after months of waffling had no choice but to hand over €4.5 billion (the first of many such cash rescues) in the form of a bridge loan to insolvent Bankia, which last week reported staggering losses (translation: huge deposit outflows which have made the fudging of its balance sheet impossible). As a reminder, in June Spain formally announced it would request up to €100 billion in bailout cash for its insolvent banking system, which subsequently was determined would come from the bank rescue fund, the Frob, which in turn would be funded with ESM debt which subordinates regular Spanish bonds, promises to the contrary by all politicians (whose job is to lie when it becomes serious) notwithstanding. And while Rajoy has promised that the whole €100 billion will not be used, the truth is that considering the soaring level of nonperforming loans in Spain – the biggest drain of both bank capital and liquidity – it is guaranteed that the final funding need for Spain’s banks will be far greater. As a further reminder, Deutsche Bank calculated that when (not if) the recap amount hits €120 billion, Spanish total debt/GDP would soar to 97% in 2014 from an official number of 68.5% in 2011 (luckily the endspiel will come far sooner than that). But all of that is well-known, and what we wanted to focus on instead was the fact that bank bailout notwithstanding, Spain will have no choice but to demand a full blown rescue within a few short months for one simple reason: its cash will run out.

Before we dig deeper, a quick reminder: while everyone focuses on the cash generation by the Spanish sovereign, via the almost daily Bill and Bond auctions, what many forget is that the bulk of the proceeds is merely used to refinance existing debt. The remainder goes to fund the actual national deficit (of which there is plenty to go round), and to be deployed via various less than legitimate channels to keep insolvent financial institutions “solvent” until such time as these can become someone else’s problem. Namely Germany’s. Until that happens however, Spain is facing crunchtime as it has to fund over €40 billion in debt maturities in the next two months alone.

A secondary problem is that not only is Spain still facing a gaping primary deficit, it also has to pay the interest on its rolling refis  which as everyone knows, and Rajoy most certainly, are unsustainable in the 6%+ range, not so much standalone, but certainly when juxtaposed with an economy which is collapsing in nominal terms, and is “growing” at a -0.4% growth rate. In other words, compounding the refi issue, is the fact that ever more of the organic growth from the economy has to be paid out to various state creditors.

Add the fact that the economy itself continues to collapse, with unemployment deteriorating with no bottom in sight, only completes the triangle of terror.

Which brings us to Exhibit A: the chart below shows Spain’s National Account monthly cash balance, broken into its two subcomponents: the deposits at the Banco de Espana, and the Treasury Liquidity Tenders (columns 11 and 12; full historical breakdown here). The reason we bring it up is that this is the chart that everyone loves to forget.

The chart shows is that in July the Spanish cash balance dropped to €23 billion after hitting a 2012 high of €54 in March. It has plunged straight line since then, unable to repeat last year’s July cash surge (when the number was more than double), and if the recent deposit outflow is any indication, the government will have had to plug many bank holes using fungible cash using any means necessary and possible. In other words, once the next Spanish State Liability update is posted, we wouldn’t be surprised to see this number plunge to a new post-Lehman low. Yet what is scariest is that all else equal (and it never is), at the current run rate Spain may well run out of cash by the end of the year even assuming it manages to conclude all its remaining auctions through year’s end without a glitch.

What all this really means it that any debate over whether Spain needs a bailout is at this point moot. It also means that absent a direct cash injection into the Spanish sovereign, Rajoy will have no choice, but to demand a bailout. What he does subsequently – whether he stays or he goes – will determine if the Spanish transition from a sovereign state to the latest vassal entity of the Troika and, more importantly, Germany will be peaceful (as much as possible) or rather violent.

h/t Wallstreetmane

Guest Post: The Big Swiss Faustian Bargain

Submitted by George Dorgan of SNBCHF blog,

Differences between SNB, ECB and Fed Money Printing Explained

Most recently Guggenheim Partners showed in their “Faustian Bargain of Central Banks”, also appeared in the FT, that the Fed could lose 200 billion US$, when inflation comes back again. Interest rates would increase by 100 basis points and the US central bank would be bankrupt according to US-GAAP.

We explain in this post the differences between money printing as for the Swiss National Bank (SNB), the ECB and  the Fed. We show the risks the central banks run when they increase money supply, when they “print”.

This link to the SNB website gives insights how many francs the Swiss National Bank requested commercial banks to deposit during the last week. It is just a technical accounting process: Minus (or liability) for the SNB, Plus (or assets) for the banks. Therefore it is often called “printing” like adding a zero to a currency exchange rate. The SNB uses this “printed” money to buy more and more currency reserves and to enforce the peg. At the same time printing increases the banks’  reserves at the central bank. It allows banks to give more loans to consumers and home builders via the money multiplier.

During the times when the SNB buys FX reserves, the increase of bank deposits, i.e.SNB debt at banks, moves nearly in-line with the increase of FX reserves.

SNB Graph FX reserves Money July27


The Limits of Money Printing


The following graph from the SNB former president Hildebrand (2004) shows that a period of inflation had regularly followed the SNB monetary expansion with a delay of about 2-3 years.

Price Inflation follows Monetary Expansion

Price Inflation follows Monetary Expansion (Source Hildebrand SNB)


Theoretically banks could tell the SNB not to credit their accounts any more, this would prevent the SNB from further printing. Still banks are sure to get the money back one day and they want to be more profitable issuing more loans. Therefore the SNB had ideas for an anti-cyclical capital buffer in order to stop excessive mortgage loans practices and preserve banks’ capital for a possible downturn. Many people fear the a similar bust of the Swiss real estate bubble like in the 1990s.

The SNB thinks to be able to get rid of their excessive currency reserves one day and/or to sterilize deposits (i.e. remove sight deposits from the banks and to convert them into SNB bills). The deputy member of the SNB board Dewet Moser proudly presented in this SNB paper how easy it was to sterilize between May 2010 and July 2011 (see also in the reserves overview above). However he does not speak about the fact that the Swissie strongly appreciated (from EUR/CHF 1.40 to 1.10) during that period and the SNB had to accept huge losses.


Money Printing in the euro system and the potential tax-payer bailout of the Bundesbank


Inside the euro system, the most important way of money printing is debiting the account of the ECB and crediting the accounts of the National Central Banks (NCBs)  according to their participation in the Euro system.  This is along the following schema:

Money Printing and Eurosystem Participations

Eurosystem Participations

30% of the ECB capital belongs to non-euro states like the UK, Sweden, Denmark, Poland or other non-euro EU member states. These 30% are removed in order to obtain the participations in the euro system.

Printing money means that the ECB increases its debt towards the NCBs in the ratio of the euro system participations, namely Bundesbank 27%, Banque de France 20%, Banca d’Italia 20% and Banco de Espana 12%.

If the ECB buys peripheral bonds with this “printed” money, it implies an implicit transfer from the Bundesbank and the Banque de France and other Northern states towards the periphery, i.e. state financing via the printing press.  By nature of the bad ECB assets this is also called “qualitative easing”. 

The Bundesbank losses could be partially realized, when one day a country leaves the eurozone (either Germany or some peripheral countries). What does “partially” mean:
We saw already similar discussions in March, when it had to be decided, if private or public entities take the losses in Greek government bonds. One day, maybe in a couple of years, the ECB or the Bundesbank, the public entities, will also need to take losses, a haircut.

The Bundesbank refinances the credit to the ECB, via an increase of its debt at German commercial banks. These again will possess more reserves. Based on those they may give more loans to German firms and housing. This operation will increase inflation over the medium and long-term.

The following graphs gives an overview of the of German banks’ deposits at the Bundesbank, i.e. the Bundesbank debt with German commercial banks.

Net Bundesbank Assets vs. German Banks

Net Bundesbank Assets vs. German banks dive deeply into negative territory (source

Bundesbank Liabilities vs. German Banks

Total Bundesbank Liabilities against German banks    (source


On one side the Bundesbank has more and more liabilities with German banks. On the other side this graph shows how much foreign Bundesbank foreign assets have risen over the years:

Bundesbank Foreign Assets

Bundesbank Foreign Assets (source


A future haircut of 30% on peripheral positions (of currently about 700 billion €), would cost German taxpayers, 210 billion €, 5% of German GDP, more than the Bundesbank equity. This haircut would require German tax-payers to bailout the German Bundesbank. See more why Weidmann has finally realized this problem together with inflationary risks and his critics with the ECB.

The Swiss Faustian Bargain: Swiss Money Printing a lot more risky than the Fed’s QE3


Most recently Guggenheim Partners showed in their “Faustian Bargain”, also appeared in the FT, that the Fed would loose 200 billion US$, when inflation comes back again. Interest rates could increase by 100 basis points and the US central bank would be bankrupt according to US-GAAP.  For them the Fed’s Faustian Bargain with the Mephisto “inflation”. For us the SNB money printing is a even lot more risky than the Fed’s Quantitative Easing. The graph shows where the Swiss problem lies:

Money Printing of Major Central Banks

Money Printing of Major Central Banks (Source Guggenheim Partners)


The SNB’s ratio of printed money to GDP is a lot higher than the one of the Fed. In case of inflation the Fed’s losses of 200 billion USD amount “only” to 1.2% percent of the US GDP. It would imply, as Guggenheim Partners state, a bankruptcy in terms of  US-GAAP. But still the Fed will be refinanced by the generous US tax payers.

The risks for the SNB, however, are eight to ten times higher: based on current FX reserves, it will cost at least 10% of the Swiss GDP,if Swiss inflation picks up and the Euro crisis will be not resolved till then.

As opposed to the ECB, the SNB only buys high-quality assets, mostly German and French government bonds. However for the SNB the assets are in foreign currencies, for the big part they are denominated in euros. FX rates move a lot more quickly than American government bond yields do. This is a risk the Fed does not have, and the Bundesbank neither, as long as the euro zone stays together.

Further Fed quantitative easing drives the demand for gold and the correlated Swiss francs upwards.  Sooner or later this will pump more American money into the Swiss economy and will raise Swiss inflation. At the extreme a Quantitative Easing number XXL will bankrupt the SNB or force the tax-payer to bail out the SNB. This might raise the currently low Swiss public debt to levels similar to Germany or France.

bernanke draghi Mephisto

The same applies for ECB printing and purchases of peripheral bonds: This will drive money out of the euro zone and out of Germany into Switzerland. Therefore the SNB can still hope that QE3 and ECB peripheral bond purchases never come. For the SNB these two are the Mephistos: Bernanke and Draghi, the ones who promise easy life based on printed money.

Man Who Sold the World

Market Shadows: Man Who Sold the World

Here’s the latest installment of MarketShadows: The Man Who Sold the World: Sept. 2, 12.

(Named after the song, “The Man Who Sold the World.” Pic credit: Jesse’s Cafe Americain)


  1. Nothing announced at Jackson Hole.
  2. Jobs gained since 2008 were disproportionally low-wage jobs, as middle class jobs have been steadily declining (outsourced).
  3. Gains in the stock market since 2009 have been largely due to the Fed’s zero interest rate policy (ZIRP) and quantitative easing (QE).
  4. A majority of GDP growth has been due to the consumer, and the stock market. Obama has cut government jobs.
  5. The stock market reflects the moves in the Dollar; the Dollar is at a critical point.
  6. Exelon Corporation (EXC) is our stock pick this week. It’s going into the virtual portfolio as a buy-write–we’re selling a call and selling a put against 100 shares.
  7. Pause in Treasury supply next week, enough liquidity for market party to continue–assuming no surprises.


The U.S. stock market notched a third month of gains in August! Friday’s premarket pump kept the longest monthly rally alive for everyone to enjoy the holiday weekend.

Ben Bernanke made no earthshaking announcements on Friday, at his annual appearance at the Kansas City Fed’s economic symposium in Jackson Hole, Wyoming.  As the Economist reported:

“The world was wondering whether [Ben] would send a definitive sign that action was coming. He did not, merely repeating the key sentence from the August statement, that the Fed ‘will provide additional policy accommodation as needed to promote a stronger economic recovery.’ This should not have been surprising; Fed chairmen don’t like to front-run the Federal Open Market Committee [FOMC].


“Mr Bernanke had a different goal than signaling to Wall Street. Pressure on the Fed has become intense in the last year, from hawks and conservatives (not necessarily, but increasingly, the same) who think the Fed has done all it can do and going further risks inflation, monetization of the debt, and a loss of credibility for the central bank; and from doves and liberals who accuse Mr Bernanke of having shirked his responsibility and his own prior advice to the Bank of Japan by not more aggressively using the tools and alternative frameworks available to boost employment.”… (The road to QE3)


Wondering whether Bernanke’s hands will be tied going into September, and speculating on a relatively decent non-farm payrolls number for August, Bruce Krasting wrote, 

“I would think so, but I don’t think like Bernanke.


“If the economy produces, on average, only 150k new jobs per month, then the unemployment rate will remain high (8+%), for a long-time. Ben doesn’t want that as his legacy. The talk on Wall Street (and the manipulated financial press) is that a new round of QE is coming in a fortnight. It will be $500B in size (spread over 6 months). It will be directed at MBS securities…


“There are extremely asymmetrical results associated with more QE. Yes, there might be a few more months of ‘party time.’ But when the party ends (it will), the cost will be ten times the short-term gain.


“Ben Bernanke can afford to throw another party in September. The reason is that he will not be around when the inevitable cleanup of his mess starts. He’ll be back in Princeton when the SHTF.”… (SSA on NFP, Unconventional Policy and the Hangover)


Of course, the upcoming presidential election raises the stakes and politicizes the Fed’s actions.

Jobs gained in the ‘recovery’ have largely been jobs paying lower wages. In last week’s MarketShadows, we discussed a study by Senier Research showing that median household income fell 4.8% to $50,964 since the recession ended in June 2009. Data from the Naional Employment Law Project shows why. During the recession, employment losses occurred throughout the economy, but were concentrated in mid-wage occupations. In contrast, during the recovery, employment gains were concentrated in lower wage jobs. Lower wage jobs grew 2.7 imes faster than mid-wage and higher-wage jobs. Specifically:

“Lower-wage occupations were 21 percent of recession losses, but 58 percent of recovery growth.


“Mid-wage occupations were 60 percent of recession losses, but only 22 percent of recovery growth.


“Higher-wage occupations were 19 percent of recession job losses, and 20 percent of recovery growth.


“The lower-wage occupations that grew the most during the recovery include retail salespersons, food preparation workers, laborers and freight workers, waiters and waitresses, personal and home care aides, and office clerks and customer representa- tives.”



Median household income by age revealed that most of the income losses occurred among people in the early stages or final stages of their careers. Moreover, older workers’ ability to retire has taken a substantial hit, resulting in the elderly taking positions from younger workers. The Fed’s Zero Interest Rate Policy (ZIRP) – loss of income from safe investments – has intensified the pain. This factor has forced investors into riskier assets–Bernanke’s third and unofficial goal: propping up the stock market.

Not surprisingly, the National Employment Law Project also concluded that, “The unbalanced recession and recovery have meant that the long-term rise in inequality in the U.S. continues. The good jobs deficit is now deeper than it was at the start of the 21st century.”

Since the financial meltdown in 2008, the Fed has been expanding its balance sheet. Bernanke believes, without evidence, that his balance sheet policies are effective: “After nearly four years of experience with large-scale asset purchases, a substantial body of empirical work on their effects has emerged. Generally, this research finds that the Federal Reserve’s large-scale purchases have significantly lowered long-term Treasury yields… These effects are economically meaningful.”

Economically meaningful to some. The stock market has responded to the balance sheet expansion lock-in-step. But does quantitaive easing increase employment? Not significantly. Has it helped the middle class? No. (Bruce discusses this in SSA on NFP, Unconventional Policy and the Hangover)

QE gives money to the banks, which were theoretically supposed to lend out excess reserves. However, individuals have enough debt and have been de-leveraging. Small businesses have not been hiring, but have been complaining that is it difficult to secure loans. While large companies have money on their balance sheets, many have been laying off workers.

In effect, QE primarily benefited the banks and the stock market (higher net worth individuals). The banks have taken systemic risks in the market. Indeed, evidence demonstrates that quanitaive easing helped the banks and the largest companies, but not the little guy or the American economy as a whole.



Over the past few years, the government has been drag on  the US   GDP   growth.  ‘Austerity’ measures implemented  by Obama and Congress have been  pulling growth   the wrong way. It seems counterintuitive, because the deficit is growing! What  is  the government spending our money on? Defense, Health  and Human Services, and interest on the debt itself.


Looking ahead, Lee Adler of the Wall Street Examiner reported:

Connecting the dots, I think that the huge amount of new supply [Treasuries] had a lot more to do with the stock market buckling on Thursday than the economic news did. But the pundits and the media never make the connection between massive Treasury supply and market disruptions. Instead, they concoct all kinds of spurious excuses for it….


There still appears to be more than enough liquidity flowing into US markets to continue to support bull moves, so that when one market takes a hit, the other tends to see some of the excess cash flows…


But withholding tax collections have again been running weak, so there’s a chance that the government may need to roll those bills or increase the size of the 4 week bill. We’ll know better on Monday… (Withholding Improves but Treasury Out of Cash Again, Pounds Market With Supply)


Next week should also see some fireworks with the ECB and August unemployment numbers.

Until then, have a wonderful week.

– Market Shadows writers/Ilene

Full newsletter here.

Gold May Not Be Money But It Is An… Airline? Bloomberg Freudian Slip Du Jour

Ignore the news about what is surely the next airline to join every other legacy, and not so legacy, carrier into Chapter 11 and focus on the headline, where both the story author and its editor seem to have been preoccupied with Freudian ruminations if not on whether gold is money, then certainly how much paper money one can generate by selling gold…

Source: Biggest Airline Debt Spurs Gold Asset Sale Speculation

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