Northward bound

A couple of notes before the writer disappears to Holland for a week...

The Bank of Spain, wasting no time in the wake of the successful Bankia and Banca Cívica IPO's, has intervened in the operations of Caja de Ahorros del Mediterráneo - giving the boot to its board of directors in the process. The FROB will inject a reported 2.8 billion euros in equity capital and provide a 3 billion credit line before auctioning CAM off in the autumn. Seeing as now all of the significant players in the caja space are now seized or fully capitalized and converted into banks, we'll leave it to the reader to calculate how long it will take to get to the 127 billion euro guess at the system's capital requirements that was spewed out of the arse of some ratings agency or another late last year. Having done their sums, Ibex Salad fans might ask themselves if Moody's, et al, actually serve any purpose that is not the promotion of the speculative trend du jour.

Statistics watchers should note that non-performing loan figures for Spanish financials now no longer distinguish between cajas and banks and are quoted for the entire system. Makes sense considering the former have effectively ceased to exist. Wonderful invention at the end of the 19th century, but the euro turned into their personal Peter Principle.

Bankia went public at 40 percent of book. The support this bank will receive from what will almost certainly be a PP national government following elections next March makes it a 'buy'. This is, after all, still Spain.

Look for some improvement in the availability of credit in the near future. Lending was certainly suppressed by both Bankia and Cívica in the lead-up to their debut in the market.

Bankia's principal shareholder, BFA, cannot meet its obligations relying solely on the dividends it receives from its holdings in that bank plus Iberdrola and Mapfre. Continued pressure on housing prices will be the result of their selling off the property holdings inherited from the various cajas from which it sprang.

Hasta la vista, baby.

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True grit

The thing about this year's Tour de France is, as we've said before, that no one showed up with a team fit for the job. The end result was a cutthroat race that depended solely on personal bravery. Lots of kudos to go around in this regard...

1). Cadel Evans - wheel sucker no more, he ground it out with the help of no one and won the race on a magnificent time trial;

2). Thomas Voeckler - defended the yellow jersey like no one;

3). Andy Schleck - saw that Contador was on the verge of bonking (which he did) and disappeared up the line - 60 kilometres out;

4). Alberto Contador - no horse in the race but his dignity following Thursday, he attacked 90 km from the finish. That lasted for 60. Then he did it again on the first ramp of the Alpe d'Huez. Topped it off with 3rd in the time trial.

The bad stuff - all strategy...

1). Leopard-Trek - for not trying to bust Contador and his swollen knee in the Pyrenees;

2). Saxo Bank - why didn't Riis send a couple of guys with Thursday's breakaway?;

3). Andy Schleck - should have held off when an out of contention Alberto broke away on Friday. Between his team, BGM and Europcar, they had the interest - and the legs - to run him down later. He didn't, and gave the race to Evans.*

The regret...

Again, Bradley Wiggins' withdrawal. The same stuff that had Evans win it would have seen him right there at the end.

Best quote...

1). Alberto Contador following Thursday's debacle - (from memory) ' I tried for the double (Giro/Tour) and, in the end, couldn't do it'.

*A reasonable guess would be that he thought they would open up an unbridgeable gap on the Australian. He could have done that on his own if he'd stayed with the peloton.

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Bankia day one

After having lowered its minimum expectations about 25 per cent to make sure the deal went through (at the worst moment since early 2009 to stage a bank IPO), Bankia made its long awaited debut at the Bolsa de Madrid at 12 o'clock this morning. As the Yahoo! chart shows, BKIA immediately fell off a 6 percent cliff, recovered quickly to around 3.67 euros and proceeded to meander its way upward for the next 4 hours to close unchanged from the 3.75 issue price.




Below, courtesy of Expansión, is a rundown of the brokerages involved in the first hour and twenty minutes of trading.

In the right column, the houses representing sellers - lots of retail customers dumping what their Caja Madrid manager had cajolled them into buying. And who did the buying? J.P. Morgan almost exclusively. Being one of the deal's bookrunners, we wouldn't be a bit surprised if JPM, not wanting to let a touch of retail panic ruin an already bad situation, were buying for their own account. As we said last week... 'Readers could expect banks (even if it turns out to be the book runners themselves) to fill whatever breach there might be.'

Most interesting were the 26 million shares that crossed at 3.72 euros at 15:36.

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Stress tests, v.2

The folks have been howling that the recent EBA stress tests conducted on euro zone banks failed to include the possibility of of defaults, haircuts, burden sharing or whatever affecting the value of their sovereign debt holdings. One would have to assume that equity markets, however, have taken this into account.

The included charts, notwithstanding that Spanish guvvies are yielding more than their Italian counterparts, give some indication as to the probabilities assigned by equity investors. Spanish exposure was far less penalized than Italian since July 1st. Click on them to read the explanatory material.

The data were provided by Olaf Storbeck through his website, Economic Intelligence. He's taken the enormous trouble to list on a spreadsheet the peripheral sovereign debt exposure for each and every of the 90 banks submitting to the stress tests.

Some people really do add something extra to the internet - but they're so very few and far between.

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Random notes from the cliffside

A few observations as the yield on the Spain 10-year gets to 6.3 percent (with the tesoro planning to auction 7 billion this week):

1). The equity trade to be in today is long Spanish banks/short German, Italian and French. At the time of writing it has turned 2 percent since Friday close. (SAN, BBVA vs. ACA, GLE, DBK, CBK, BNP, UCG, ISP - half to each group, equally weighted);

2). The euro refuses to credibly break below 1.40 to the US dollar. Although that may well be a comment on the relative nitwittery of political leadership. Merkel's truly bad, Zapatero and Berlusconi are hopeless fools and Sarkozy is simply missing in action, but nothing short of the regular parliamentary fisticuffs in the Ukraine compares with the United States congress;

3). The front month bund contract, calculated free of contango, can't seem to get above last summer's highs. Will anybody really want to be long the deutschmark at 2 euro-equivalent to the buck? We'll take the peseta, any day.

Along the usual lines of how difficult it is to actually extract information, beyond the trend of gossip, from the media... the lunchtime TVE news reporter from the Bolsa de Madrid had it (translated from memory) that 'the premium that investors had to pay to invest in Spanish debt had risen to 6.3 percent'. Magic realism.

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What we're up against

Having had ample experience at adding recurring content to Ibex Salad, and then abjectly failing to follow through (in the end, the remuneration we receive might be a factor), we hesitate to add a weekly feature singling out the really blatant sins of both omission and commission committed by the English-language press in its Spain coverage. Tentatively we'll call it 'What we're up against'. Suggestions regarding a title - and content - are welcomed in the comments box.

The publisher of the widely read and deservedly well regarded blog The Big Picture, Barry Ritholtz, is know for his well thought out diatribes against the misreporting of facts in the public media. Mysteriously though, his critical eye seems to go blind on the rare occasion that he ventures beyond the safe shores of United States To tell the truth, he seems jump right to the front of fact-free bandwagon.

Referencing a WSJ article which simply relays that the incoming PP government in the region of Castilla-La Mancha (producing 3.4 percent of Spanish GDP) is claiming that the budgetary deficit left by the prior PSOE regime may be around double the previously claimed, he manages to come up with this...

Spain’s budget deficit may be more than twice as large as had previously believed.(sic)

We'd hate to think he's taking one for the team here, but a certain 'CHB' points this error
out to Mr. Ritholtz in the comments - to no apparent avail.

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Tour Update

That Thomas Voeckler has not seen his hold on the yellow jersey in the least threatened through about 5 hors categorie climbs in the Pyrenees should give readers an indication exactly what a shame it is that Bradley Wiggins* abandoned with a broken collarbone in the first week of the Tour de France. As to why Andy Schleck has not shown up with a team capable of marking the difference in the mountains is beyond us, by the way. Really bad race all 'round.

*For the writer, the sport which occupies the apex of the primate athletic pyramid is bicycle racing - on the track. That a guy could make the transition from the boards to being a contender in the TdF had us tickled pink.

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Bankia Update

Readers will find out if we are right or wrong about this as soon as next Monday, but it seems to the writer that one of the immediate benefits of Monday's virulent outbreak of true European credit contagion will likely be a warmer welcome for the institutional segment of the IPO of what will be the eurozone's newest top-10 bank - Bankia. What has always been a matter of state for the Spanish government, the success of this endeavour will now also be a continental priority. Readers could expect banks (even if it turns out to be the book runners themselves) to fill whatever breach there might be.

With barely concealed glee, on the other hand, el economista accidental informs us that one of the book runners, Barclays, has availed itself of the opportunity offered by Bankia's announcement of the maximum price of the issue to modify its commitment* to Rodrigo Rato's baby. Yesterday's submission to the Spanish market supervisor, the CNMV, notes (besides fixing 5.05 euros as the maximum) that the British bank had decided to only take up 6.41 percent of the retail, non-institutional, portion of the IPO - rather than the previously agreed 8.97. A quick calculation, based on the 60 percent that Bankia intends to sell to the public, reveals that Barclays is backing out of 1.54 per cent of the total issue.

For readers not familiar with all this, the book runners (or primary underwriters) agree to buy up entire portions of an equity or debt issue with the intention of reselling at a higher price. Barclays decision comments not only on the minimal interest in Bankia among foreign retail investors but also, by the small allotment size, the minimal expectations with regard to this group on the part of the principals.

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Safe haven

The safe haven spreads in the eurozone world of large banks since July 1st have been (depending on one's selection of names), approximately:

1). Long Germany vs. France, Italy, Spain - 4% returned;

2). Long Spain vs. the other three - 2% returned.

The 5 percent jump in SAN from low to close and the 46 bps drop in the Spain 10-year yield from high to close - lots of blood flowing from the short crowd. The only news was the usual - that somebody in the EU might be doing, or might be considering doing, something about it all now or at some yet to be determined date in the future. Guerrilla warfare defined.

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The Rubicon

A few remarks on today's eurozone sovereign debt chaos...

1). Ostensibly triggered by 'concerns' over Berlusconi's funhouse, the Italy-Spain 10-year spread remains unchanged from Friday. That measuring press headline references has gone ballistic;

2). At last, the short end of the Spanish yield curve is taking it on the chin - the 2-10 has flattened 33 bps in two days. Being the opposite of what we observed only three weeks ago, it is unequivocally bad news;

3). The whole thing is turning into Rodrigo Rato's worst nightmare. The drubbing being taken by Spanish banking stocks, if it continues, will make a mess of even his low estimate issue price for Bankia. A cancellation of the IPO, however, would most certainly set in motion a whole series of even more undesirable events much higher up the food chain. In this regard, our prior comment on the impossibility of covering your impending rent payment with a punt on the sixth race becomes even more pertinent;

4). Last, a mere question. Do the European Union and its member states have a 'Plan B'? Or is it sálvase quién pueda?

As we hit the 'publish' button, the yield on the Spain 10-year is crossing 6 percent.

Quick update: Alphaville has posted lists of the big eurozone stock and corporate credit market losers on the day. Not a Spanish bank to be found - although Telefónica and Iberdrola bonds do figure.

?????????????

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Feature? Or bug?

Although having no strong opinion at all on the matter, we find it fascinating that this week the argument that Italy did not rightfully belong in the PIIGS club because most of its public debt was held domestically is now being touted as a reason for its immediate inclusion. As FT Alphaville points out:

'They absolutely are up there with Japan and the UK in managing to tailor issuance of a lot of bonds to a big, domestic investor base. True, but on the other hand, all this complexity might end up working against Italy one day if it needs to find foreign buyers.'

We did notice, however, several comments from people who actually trade these things for a living that the mob might be moving on, having taken a few stop-loss lumps on those Spain shorts that just won't go anywhere.

Time will tell.

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Red Giant, Black Hole

The following is more suited to a flow chart. But seeing as the writer can not read them properly, let alone design one, words will have to do.

The long awaited Bankia IPO has been in progress since last Thursday. Its almost assured success (between Rodrigo Rato's lowered valuation expectations, the hard sell inflicted on retail customers, the circling of the wagons by corporate Spain and an intense lobbying effort among certain sovereign wealth funds) merits a short commentary on the relationship between what will certainly be a rich dividend, its ownership structure and which group will end taking the lumps for all those bad property developer loans.




First, a couple of quotes from today's Spanish press (both from Expansión, translation ours):

Bankia considers selling more than 50 percent of its capital;

Rato tells institutional investors that the Bankia dividend will be 7 percent.

Now, in point form, the ownership structure of what is, cobbled together from the amalgamation of Caja Madrid, Bancaja and several other cajas de ahorros, the third largest Spanish bank:

Until the IPO is completed, the 100 percent owner of Bankia is an unlisted bank by the name of Banco Financiero y de Ahorros;

In turn, BFA is owned in some semblance of proportionality (although Bancaja ended up over-represented) by the charitable institutions which remain of the cajas following their passing over of all of their banking assets to this entity.

Now, who owns what of the mishmash of assets from the original partners:

BFA ends up with most of the bad real estate assets - NPL's, repossessions, equity-for-debt transfers, etc.) - all of the dividend producing industrial portfolio (Iberdrola weighing heavily here) all of the not-high-yielding-enough unsecured retail debt known as participaciones preferentes and the four and a half billion euros in convertibles that constitute the state bailout fund's contribution to date;

Bankia keeps the live banking assets, the non-dividend producing equity holdings and the normal course-of-business wholesale and retail debt - including deposits.

A few points that need to be understood:

BFA, despite being characterized as a 'bad bank', has to be able to pay the high interest on the FROB funds (as well as pay back the principle in about four years) and it must show a profit. Failing to do either allows the state to intervene, in which process the Banco de España becomes the dominant shareholder in Bankia. Hence, the handing over of the dividend-paying equity portfolio (including what ends up being their final share of Bankia). As an aside, Bankia is taking advantage of the situation in order to deal with Basel III accounting standards which lower the value of equity holdings in a bank's capital structure;

Bankia needs to raise something approaching four billion euros from the IPO in order to achieve an eight percent core capital ratio;

The end result of these fixed monetary requirements is twofold:

Bankia, as the reality of investor interest has become manifest, has had to approximately double the percentage of itself that it is selling off;

As this public portion expands, in order to accommodate the income required to keep BFA solvent and to continue to feed the NGO's that remain of the original cajas (whose sole income will be the BFA dividend), Bankia has to increase the dividend yield as the initial price drops. A rough guess - keeping in mind how truly bad the writer is at these estimates - as to how much has to be turned over would be 280 million euros a year.

So, who takes it on the chin when things don't turn out exactly as planned? That's simple. The original cajas via the BFA dividend which, by force of nature, will be the shock absorber of first and last resort. That means fewer stupid, brand new and underused community centres in the thousands of small towns which dot, like an outbreak of measles, the Spanish administrative and political aspect and more bankruptcies and disappearances of second and third division football teams - the support of which somehow falls under the legal definition of obra social.

The upside to the above is that the situation has the potential to align the political and financial incentives of regional hot-shots that control the disbursement of the caja's funds with those of the folks charged with administration of Bankia. Simply put, Bankia's enormous capacity to reduce duplicate branches and otherwise achieve economies of scale will be less resisted by the homeboys if the BFA dividend is at stake.

Bankia stock, in our opinion, will (besides being a no-growth proposition for the foreseeable future) probably drop in value following the IPO. But that 7 percent is juicy - and safe.

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Gold amongst the dross

Edward Hugh has published a massively verbose 5,731 words on what mostly ends up as an attempt to defend, against all evidence to the contrary, his belief in the lack of international competitiveness of the Spanish economy - and, by corollary, the merit (nay, necessity) of his 'internal devaluation' prescription. Despite its displaying his normal misunderstanding, and consequent misinterpretation, of the economic data which he presents, it does contain some interesting little tidbits.

Pale as it might when compared to his truly incredible 2010 masterpiece of statistical illiteracy and self-delusion, in section number five of his entry he puts up the chart on the left as 'proof' of an ineffectual Spanish export sector. Readers will probably be as surprised as we were, notwithstanding Mr. Hugh's conclusions, that exports from Spain - expressed as a percentage of the same from a booming Germany - appear (judging by the upward slope of the line in the lower right hand corner) to have increased since mid-2010.

Just a detail.

Sublimely fascinating, however, is the graph of the Spanish and German CPI's on the left. Before moving on to the really fine little nugget contained therein, we'll lightly mention Hugh's failure to note that the 2010 surge in the Spanish version was the result of an increase in the country's value-added tax and is categorically not a symptom of uncompetitiveness - especially considering that exports are not charged the IVA.*

But the truly interesting point on the chart is that the inflation rate spiked, not on the July 1, 2010 introduction date, but in what appears to be March or April prior. We think it is more than a coincidence that, in late March, giant retailers Carrefour and Mercadona announced that they would not be passing the tax increase to their customers. Why bother when you can do it three months earlier, when nobody's looking, and pocket the difference?

*Curiously, Mr. Hugh chooses to bring the matter up a mere five days before the first anniversary of the tax increase - the day on which the effects on the inflation rate will fall off the statistical record and it will return to a eurozone standard in the mid 2's.

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