A Thing of Beauty

We marvel at the exquisite beauty of the deal that converts Barcelona-based, nationally present caja de ahorros, La Caixa, into a listed bank - to be named CaixaBank. Now that most of the details have become apparent, we'll share them with our readers.

1). The non-profit foundation that was the owner of this large institution transfers almost (this is crucial) all of its banking assets to its own investment holding company, Ibex 35 component Criteria;

2). In turn, Criteria passes nearly all of its portfolio - 36.5% of Gas Natural, 24% of Abertis and Aguas de Barcelona, among others - to the NGO which will continue to do what it does (it has been said that it is second in the world in size to the Bill and Melinda Gates Foundation);

3). Escaping this change of ownership will be Criteria's investments in various European, American and Asian banks and financial intermediaries;

4). Also exempt from the hassle of moving house will be all of La Caixa's non-mortgage real estate 'assets' - including repossessed shares in fallen giants Metrovacesa and Colonial and the equity-for-debt residential real estate portfolio of earlier swallowed up Caixa Girona, as well as any undesirable property-related assets that fall into their hands for up to a month following the closing of the deal.

Stated more directly, CaixaBank will be born free of all the rubble and debris that litters the path of its competition.

The contract values the new entity at a bit over 20 billion euros. Our only beef is that the public float will be a mere 19 percent - a situation which we imagine that funding necessities will correct in due course. After returning to trading at 12:30, Criteria closed up 17% on volume of 42 million shares - 13 times its 3-month average.

A couple of corrections to yesterday's piece on the same matter. Our idiot staff mathematician concluded that the caja space dropped from 50 to 30 percent of Spanish banking activity on this news. In real life, that would be 40 percent. The 10.9 percent core capital refers to Basel II calculations. Basel III would be 8 percent.

And this just in: Moody's has apparently put Criteria under revision for a possible upgrade from its present A2 classification.

----------------------------

La Caixa takes the short cut

The long-rumoured conversion of Catalán caja, La Caixa, to a bank is coming to pass. Although the intimate details are not yet made public, the plan appears to be hive off their banking operations and trade them to listed (14.5 bn euro market cap), 60 percent owned holding company, Criteria, for this latter's investment portfolio. The charitable organization that remains after this operation lives from the dividends generated from companies like Gas Natural Fenosa, Telefónica, Criteria itself and a series of foreign banks. In turn, Criteria becomes a bank which, following what Reuters reports as a coming convertible debt issue, will sport Basel II core capital of 10.9% - this aside from being 40 percent owned* by outside interests and already an Ibex 35 component.

The immediate effect would be to shrink the savings bank sector to a much smaller (if sicker) under 40 percent of the Spanish banking world - this before La Caixa's thought-to-be-imminent swallowing up of three regional cajas that have run out of viable options. In a perfect world, it might also get the idiot brigade to finally stop heaping everybody into the same pile.

Secondary results might include getting Rodrigo Rato and BanCajaMadrid's ass into gear.

Criteria up 3.18% before trading was halted this morning.

*Cajas y Bancos is reporting that the public float will shrink to 19% following the operation.

----------------------------

Salgado Speaks

The immediate reaction to Spanish finance minister Elena Salgado's caja solvency plan was positive - at least at the short end. Today's auction of 2.5 billion euros of letras saw the 3-month yield drop from December's 1.8% to 0.98. The 6-month portion saw yields tumble from 2.6% to 1.8. Bid-to-cover was 5.48 (vs. 2.14 in December) in the first case, and 5.1 in the latter, about equal to the prior auction.

The secondary market yield on the 10-year may (or may not) be telling a different story. Bloomberg is reporting this at 5.35% - about 10 bps higher than yesterday. The Financial Times, for its part, claims that the figure is 5.18% - 7 less.

Whatever.

As for criticism that the 20 billion thought to be sufficient by the Spanish government in the event that some laggards fail to get their acts together and force the intervention of the Bank of Spain... first, the amount isn't engraved on stone tablets delivered by a burning bush. Second, those in charge of possibly not sufficiently solvent institutions only need to think that it might be them getting intervened to put them in motion. The Spanish government won't be showing its hand on this one.

----------------------------

D-Day

The international press is rife with speculation that the Spanish government will be partially or wholly nationalizing, less than impressed with their half-hearted efforts to sort themselves out, a number of cajas de ahorros. Estimates that this writer has encountered as to the amount to be devoted to this task range from 15 billion euros - to 80. Interestingly, investors in Spanish debt seem to have finally got it into their heads that even the highest of these rumoured amounts will not prove to be an unbearable burden on the Spanish government. The 10-year benchmark spread briefly got under 200 bps last week - for the first time since November - before closing Friday at 203.

Whether he has the courage to actually do it, the call the writer would like to make is that the Bank of Spain and the PSOE government are tired of Rodrigo Rato's playing party politics with the SIP over which he presides... and are going to go directly for BancaCajaMadrid/Banco Júpiter. As badly as the current powers-that-be would like to see the caja situation resolved as soon as possible, the former PP finance minister (who made Aznar's short list for leadership of the party) would loathe the possibility that some perfectly rational action by his ward would end up throwing a lifeline to the socialists.

In any regard, the BdE's direct taking of an equity position in that monster would be an interesting twist on our previous bit of fantasizing about Júpiter and equity issues and the like.

----------------------------

Headline Fatigue

Hardly any time to write stuff at the moment, but the reader might consider what to make of the following headline... Spain cancels auction for syndicated bond.

There's nothing wrong with Reuters' grammar (although the mixing of two concepts joined by the word for in the same sentence leaves a bit to be desired), but we can think of a number of less confusing ways to state that Spain had cancelled this Thursday's 5 billion euro 10- and 15-year auction and, instead, had syndicated the issue today. This would have saved us the pain of living through City AM's truly idiotic teaser, Spain cancels syndicated bond auction... this leading to a cut and paste of the same piece, without attribution and even changing the name of the writer.

The issue was oversubscribed by 12:5. The yield in line with current conditions.

----------------------------

Job Opening

One of the oft-repeated reasons that Banco Santander finds itself trading at a price that offers the investor an 8 percent dividend yield is that it holds an inordinate amount of Portuguese government debt and would, hence, be hit hard by any kind of default by that country.

With the help of this Deutsche Bank chart recently published by FT Alphaville, we can track the share performance of various European banks over the last 6 months against their exposure to Greek, Irish and Portuguese debt - this as a percentage of their tangible book values.

Two banks, Dexia and Commerzbank, are effectively bankrupt if push comes to shove. Respectively, their shares change hands at 20 and 17 percent below last July's levels. Four banks - SocGen, RBS, Credit Agricole and Santander - would take an earnings hit from their 10 to 15 percent exposure. The two French banks have appreciated about 1 percent over the period. RBS has gained around 40 percent and the outlier, Santander, has shed about a quarter of its value. The worst bruised of all is BBVA, whose mere 3.7 percent exposure has been rewarded with a 27 percent drubbing in half a year.

Ibex Salad is looking for a qualified logician and analyst. The interested may apply in the comments section. Of course, picking a couple of winners from the list might remove candidates from the job market entirely.

As a most interesting side note, the Wall Street Journal this morning published an article, entitled Spain Moves to Clean Up Cajas, which clearly lays out some actual facts from this side of the reality gap. It's short. But if readers are pressed for time, the last two paragraphs are essential.

Let us know if it's behind a paywall.

----------------------------

The Hand-off

Rondaldinho, the modern master of the head fake may now be gone from the ranks of European football (his best days long behind him), but those other practicants of that art, the traders in Spanish debt, have no intention of being so easily ushered off the stage.

From Bloomberg, today's Spain 10-year. This, of course, following last week's one morning 10 bps drop in the yield to 5.27 percent - followed by an immediate 40 point rise to the 60's over four days.

The sinister glance leading to the surprise transfer of ownership of the ball, by the way, is courtesy of the noise making classes. In regard of the notching up of the racket prior to the scene depicted above, the reader might look at this NewsNow search for 'euro debt'.

----------------------------

The Competiveness Argument (slight reprise)

Last September, we popped up a post in which we insinuated that the labour cost uncompetitiveness argument with regards to Spain - and its corollary solution, the 'internal devaluation' - was a complete crock of shit not borne out by the actual facts. Another look at the data (thanks to an urging from this December piece at FT Alphaville) anything but dissuades us in our opinion.

The first chart on the left shows Spain's monthly balance of trade with the three eurozone heavyweights, as well as the United Kingdom, since January of 2000. Evidently the millstone of a fixed exchange rate has resulted in the country's deficit with Germany finding itself at near minima for the period. The cases of France and Italy speak for themselves - both positive. As for the UK, the 20 percent depreciation of the pound with respect to the euro over the period has had no apparent negative effect on Spain.

The second graphic shows Spain's trade position vis a vis the rest of world, the rest of the world less the OPEC countries (Spain produces almost no oil) and the rest of the world excluding OPEC plus the usual group of beggar-thy-neighbour economies - Germany, China and Japan.

Again self-evident. Ex-OPEC, the trade balance is negative but approximately the best its been since the year 2000. Removing OPEC plus the chronic surplus lot - which are never going to allow themselves to beaten at the game - and the trade balance is just shy of positive.

Arguments that this all reflects a collapse of internal demand in Spain deny the evidence that nominal exports have been increasing over the duration of the recession. Simply put, Spanish companies that don't or can't sell beyond their own borders run the risk of going out of business. And many are evidently reacting to this circumstance.

For our highly personal take on why Spanish exports only account for 25 percent of GDP (an almost identical figure to those of France and Italy), readers might read our later piece, Homie Nation - certainly before mocking a recent government suggestion that they might consider subsidizing from social security funds the hiring of Spanish unemployed by domestic multinationals to work outside the country.

We think the idea is brilliant, but are certain that it goes nowhere.

----------------------------

Straight, No Chaser

We were right primed this morning to award the Jean Genet Memorial Trophy (popularly know as the Ungreased Broomstick) to the first writer out of the box in 2011 with a death-of-the-euro/Spain-bailout story. Disappointingly, FT Alphaville was the only contestant.

On the left is a screenshot (from Bloomberg) of today's Spain 10-year yield. That tumble at 5 AM NY time coincides with word getting out that BBVA's 1 billion euro covered bond issue was oversubscribed.

Given the new order attendant on Germany's insistence that sovereign bond holders share in the pain of a restructuring, one shouldn't expect the Spain 10 to yield under 4 percent any time soon. But spreads should tighten - at least in the short term.

----------------------------