Firstly, surprisingly, Spanish banks need to raise funds to continue their operations. They once used the ABS markets, but these are closed. Their larger cousins are finding it difficult to raise funds at attractive rates, and they likely don’t want the potential impact of raising leverage in a potential downturn. Solution: issue the ABS securities, and use them as repo collateral at the ECB. They can then be clawed back and sold in to the market if / when conditions become conducive.

Secondly, in what sense are these transactions hidden? The securities are rated and (typically) listed, and certainly reported by all of the IB ABS research teams. So, hidden in the same sense that a LT2 private placement would be? Or hidden because unless you paid attention you might not notice them. Or, just perhaps, hidden because the journo’s were asleep at the wheel. Again.

Thirdly, the Spanish housing market / ridiculous contribution of construction to GDP and potential for decline is such old news. People have been talking about this since at least 2006 – e.g. we declined two high LTV deals from Caja Madrid on housing market fears in Nov/Dec 06, based on a formulated market view which was not uncommon amongst investors. For anyone with doubt, check our Metrovecasa’s share price movement since 06. If the press is only just on to this story, I’m really not surprised. Congratulations again to the Telegraph (and FT) for teaching the ABS market to suck eggs. He says, bitterly.

I don’t know if you caught Gillian Tett’s column on Friday in the FT? She was writing about Spanish banks- http://www.ft.com/cms/s/0/e080a31c-d067-11dc-9309-0000779fd2ac.html

Agreed though, it’s a much neglected area of coverage.

Sam Jones/FT Alphaville

I revoke that comment on the source, but not the one on the true message of the article as it meanders around hitting buttons. The fact is, though, that said news outlet very regularly comes up with stories that, given their extreme nature, one would think might appear at least somewhere else.

As for the basic fact of the matter, it is apparently the case, although I have no way of knowing how much is involved or exactly how it is being utilized. The Telegraph, unfortunately sheds little light.

But I have questions also.

Exactly how is (or was, as the case may be) this activity being disguised?

Why is it being disguised?

Does lending against AAA constitute a bailout? If so they’d better find another word for Northern Rock.

Are the amounts borrowed net of amounts returned? One recalls that the ECB made available alot of funds on an overnight basis late last year. My guess would be that those quantities have not been factored out by the writer.

Will there be ’several years of no growth’? It is already slowing down – but such a definite number over an indefinite period of time? I dunno.

Were the entire amounts of the mortgage securities mentioned in the last paragraph used as collateral at the ECB?

The reporting is substandard enough to call into question the conclusions, not to mention the motives.

Once again, my apologies for the cheesy intro.

Spain is also still a big net recipient of EU funding (which is why countries want to get in — it is a real cash bonanza for them); this money has contributed significantly to the expansion of Spain’s economy.

Are the facts of the article correct? Are Spanish banks going to the ECB with MBS paper and getting funds at essentially par? Is this propping up the Spanish housing market and the banks that issue mortgages?

Next time try addressing the substance of the report rather than just impugning the source.

A less-known, but more serious problem stemming from the decline in building is to be experienced by Spanish municipalities, however. Systematically underfunded by taxation, they have spent well beyond sustainable levels on the basis of building permit income, and the like.

http://www.ine.es/daco/daco42/cne00/pib9506.xls

This claims that construction accounted for 10.8% of GDP in 2006, although that still seems to be an advance figure/estimate and is well below the figures I have seen in the literature.

Still, it does lend some confirmation to my view that “housing (narrowly defined)” cannot account for almost 1/5 of Spanish GDP.

IIRC, that 18% splits about 1/3 housing, 1/3 CRE and 1/3 public works.

Oh wait, the Spanish banks are doing (collateralised) repurchase agreements with the ECB, while Countrywide and friends are borrowing (unsecured?) from the FHLBs, and the FHLBs are issuing tax-preferred pseudo-government guaranteed securities onto the market instead.