Monday, May 14, 2012

Bank of Spain's latest balance sheet figures point to further deterioration

Kostas Kalevras, who's been closely monitoring the ECB and the national central banks in the Eurozone pointed out this morning that Spain's central bank (Banco de España) released the April balance sheet figures (see his analysis for more detail). Two things stand out:

1. Spanish banks are now borrowing record amounts from the Banco de España (the Eurosystem). The total is 1.15 trillion Euros. As discussed earlier a good portion of the collateral are the banks' own bonds guaranteed by the government.

2. Target2 liabilities of Banco de España continue to grow, indicating further flight of capital out of Spain.

With Greece in the backdrop and this latest news on banks borrowing record amounts, the markets responded negatively. The Spanish bill auction went quite poorly this morning and Spanish sovereign spreads blew out. The 10-year spread to Germany hit a new high (above the December highs).

Spain 10-year spread to Germany (Bloomberg)

Spain sovereign CDS also hit a record this morning.

Spain sovereign 5-year CDS (Bloomberg)

Given the state of the banking system the situation will continue to deteriorate without further LTRO funding from the ECB. As we've learned earlier this year, the central bank is the only institution that can create any material support for Spain's sovereign bonds at this stage.
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