Probably Possible

An interesting short piece in VoxEU on public perceptions of the chances that a low probability event with serious consequences will occur - in the wake of one having actually taken place. Think predictions of tsunamis following a tsunami, stock market crashes following a stock market crash... or lottery ticket number combinations.

...an extreme example from the Bulgarian 6/42 state lottery illustrates the point. In September 2009, the exact same six numbers were drawn in two consecutive weeks. While no player picked the winning numbers in the first draw, 18 players did in the second draw. These players then had to share the jackpot and lost about 94% of the prize money compared to the case with only one winner.

A possible lesson to be garnered is that ex post compensation for highly unlikely events that did in fact take place may not provide the returns imagined in the future.

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Citi hires Zapatero

Not that we want to get him off the hook for his Pavlovian reaction to an opportunity to resume his hard wired good-news-all-the-time mindset, but Mr. Zapatero's inopportunely erroneous announcement that the China Investment Corporation was to sink no less than 9 billion euros into Spain's cajas de ahorros does not represent the first time that a western politician has returned from negotiations over that way with no clue as to what had been achieved, or not. If our memory serves us at all, we recall U.S. President Gerald Ford* gleefully claiming that he had a firm agreement from one of those other nations where the meaning of 'yes' is greatly complicated by the near non-existence of its opposite - Japan, in that case to open its borders to American rice.

Other items contributing to this week's trashing of eurozone peripheral debt, including that of Spain, were:

1). A recent public berating of Banco de España governor, Miguel Angel Fernández Ordóñez, by BBVA's president Francisco González;

2). Mr. Fernández's apparent refusal to play hardball with either CAM or NovaCaixaGalicia - two of the countries true financial basket cases;

3). An unfounded rumour, apparently emitted by someone at Citigroup, (with the world's press and bloggers dutifully repeating it in their role of information providers) that Greece was to restructure its sovereign debt this weekend;

and lastly, and beyond a doubt the most important...

4). Easter Week. What better moment than one of holiday sloth, abandonment and inattention to take yet another kick at the can?

Not that anyone can convince us that PP leader (and probable President 14 months from now), Mariano Rajoy, is going to have the cojones required to take on the Valencia contigent of his own party and put CAM out of its misery, it would be convenient if the utopian simpleton currently at Spain's helm were to pass the controls on to someone who has not emanated from a tarot deck.

*Readers should feel free to straighten us out if we got the wrong guy.

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February House Sales

The Future

Below, a table of the yield on a series of 12-month term deposits on offer (although we're not sure it's being advertised) by a caja de ahorros in Andalucía. The bank in question is one of the weaker links in an IPS that insists that it will be listing itself on the bolsa in the foreseeable future. The depositor has the option, but does not commit, to renew at the posted rates.

Year-Rate
1 - 4.0%
2 - 4.0%
3 - 4.5%
4 - 4.5%
5 - 5.5%

Embedded here are opinions on future interest rates, how long they believe the Spanish deposit war will continue, how much they are going to able to raise from equity markets... and possibly a guess as to how long it is going to be before reasonably priced non-mortgage credit will be flowing from this institution.

The winners when economic growth resumes will be Santander, BBVA and most of the other pre-restructuring banks, CaixaBank, the Basque cajas, Unicaja and its underlings and possibly Banca Civica - which may not be totally healthy, but at least has a marketing plan that breaks with the past.

Places like the subject of this post won't even exist tal cual by the time that term deposit expires.

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A Rock and a Hard Place

Reuters, bless its soul, is reporting that Spain is utterly awash with investment banking types snooping through both the books and the bullshit of the bankized spawn of the cajas de ahorros. An article published yesterday under the title, Spanish cajas a "feast" for bankers. As one their interviewees said, "Spain is a sort of feast for investment bankers today,... It's very rare that a single large country will probably have a third to half of the sector potentially under change of control."

One one side, private investors which Capital Madrid believes will get interested in the less bad entities at 50 percent of book value - accompanied by a complete cleansing of their management. On the other, the FROB. The Spanish state bank solvency fund, which will take an equity stake in the institutions that can not sort themselves out, has just announced the naming of the head of the department that has been inspecting the nation's cajas as director-general of the program itself.

We believe that the cajas that might think they'll get a better offer from the FROB than from the private sector - and commentators amongst the public at large that are certain that this will take place - will both be disappointed by the promotion of Mariano José Herrera to his new post.

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The Turning of the Herd

FT Alphaville today quotes an analyst opining on Spain's position in the PIG-o-sphere:

"In the name of prudence we will however use Moody’s worst case scenario where it sees a need for capital injections of up to €120bn, or nearly 8% of Spanish GDP when looking at the possible cost to Spain.... , Spanish cajas may be in a weak position, but relative to the size of the overall economy their losses and potential losses remain manageable."

The table is from the piece. Readers might note that the figures are partially drawn from the European Commission's November 2010 forecast. Readers unable to clearly recall that far back might take a look at that month in the yield and spread charts in the sidebar - and ask themselves what drives news content. First to claim it is the perusal of timely, publicly available information - rather than current gossip - wins a sow's ear.

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The Bad Bank Solution

It appears that the state-controlled bad bank solution to Spain's financial sector crisis is just around the corner. Made much less onerous by yesterday's announcement that Bankia - the elephant in the room created by the merger of Caja Madrid, Bancaja and several other minor players, will be fobbing of a full 13 percent of its assets off to parent entity BFA before coming to the equity markets with a proposed value of about 10 billion euros for the remaining 275 billion. Included in the stinky diaper will be all of the equity-for-debt property portfolio as well as non-performing and substandard loans and some of the industrial porfolio and the 4.65 billion in preferred convertibles, yielding 8 percent, issued to the FROB in exchange for its assistance in shoring up the bank's capital. The parent will keep this ugly thing alive through the dividends received from its 80 percent ownership of Bankia and property sales. In the end, who swallows all this are the owners of BFA - the charitable organizations that are all that remain of the original cajas that form the group. Hard times for cultural centres and artificial football turfs in hundreds of small towns in Valencia, Castilla y Leon and the Madrid region.

Combining this solution with that already undertaken by La Caixa*, and assuming (possibly erroneously) that another 15 percent of the sector is fully solvent, we might guess that cajas representing around 35 percent of the sector might be dedicating assets to a FROB-controlled bad bank. Then, assigning some sort of credibility to Emilio Botín's reported estimate that such an institution would need 100 billion in capital (if all the nation's bad assets were dumped into it, we assume) and that it would be funded by a bond issue which would be 50 percent taken up by the adhering institutions themselves, we end up with half of 35 billion euros to be coaxed from the markets. That would be 17.5 billion euros.

*Those wishing to heap yet more praise on La Caixa might take note of what the charitable institution that remains after CaixaBank is hived off intends to do with all those apartments that they will have inherited. This writer's bank manager reports that they will, in the fullness of time, go towards fulfilling its mandate. In other words, socially-assisted housing. This remedy is not directly available to cajas that have assigned assets to a parent IPS. They would have to buy the places back first.

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