martes, 10 de julio de 2012

FORMAL DECISION ON BANK RESCUE ON JULY 20 EU will oblige banks to sell out assets

The full details of the agreement between Spain and the European Union over the financial aid to the Spanish banking sector have still not been settled.
It seems clear, however, that the agreement will force the troubled Spanish banks to sell out a large part of their assets.
“It will be a major deleveraging process similar to what the ‘troika’ required fromPortugal,” according to a source in the sector.
The draft Memorandum of Understanding (MoU) was finalized last “Wednesday or Thursday,” according to sources close to the negotiations, and was then sent to the member states in order for them to present their comments.
During the Eurogroup meeting between the 17 leaders of the Eurozone countries held in Brussels on Monday, these comments were discussed.
The final document is expected to be approved on June 20, although, for instance, the German constitutional court will first have its say on six demands to investigate whether the agreements in the last European Council comply with the constitution. German Chancellor Angela Merkel cannot ratify the agreement until the court has given green light.
Similar to requirements in Portugal
According to informed sources, a requirement for the banks to reduce their balances through a deleveraging process will be included in this document, similar to the agreement with Portugal over a year ago.
According to that agreement, all the entities under the supervision of the Bank of Portugal had to achieve a capital ratio of 9 percent, and up to 10 percent by the end of 2012. In the case of Spain, it will be a requirement of 9 percent of obligatory capital in line with the requirements in Basel III, a global regulatory standard on bank capital adequacy.
For instance, the Portuguese bank group Caixa Geral de Depósitos had to sell its insurance branch and its non-strategic branches, including those abroad. At the same time, the European authorities required the Portuguese state to sell the Banco Portugués de Negocios to the highest bidder without setting a “minimum price” and with the aim of finding a buyer as fast as possible.
High level of conditionality
In that case, the EU used three investment vehicles – guaranteed by the state – towards those who channeled the most toxic assets to a later purchase. At the same time, it reduced the costs “to make the sale more attractive.” That means, creating a kind of ‘bad bank,’ without being one.
This is the format for the deleveraging process that will be used in Spain that will most likely include a reform of the Insolvency Law so that the guaranteed deposits will have priority over those that have not obtained this condition.
What remains clear is that the agreement in the last European Council establishes that the credit line of up to €100bn will be bound to a high level of conditionality, which will not only affect the entities that will be backed by the Frob, the state-backed bank aid fund, but will affect “the whole Spanish financial system.”
The total consolidated balance of the Spanish banking sector by the end of last year added up to €3.92trn, while the net capital amounted to €232.6bn.