Monday, June 11, 2012

Finland says that Spanish bailout cannot go to unhealthy banks

According to a Bloomberg article, not only does Finland want collateral or seniority over all other creditors to cover its exposure to the Spanish bank bailout, but it also wants its funds only used to support healthy banks.

Frankly, I cannot blame them.  Putting money into Spanish banks is gambling and not investing.

In the absence of ultra transparency, no one knows what the true condition of the banks really is and as a result they cannot assess the risk of the banks.

Finland's actions confirm exactly what your humble blogger has been saying about the need for ultra transparency.

Finland doesn’t want any of Spain’s bailout to prop up unhealthy lenders and expects some troubled banks to be split up as the northernmost euro member outlines the conditions it understands are attached to the rescue deal agreed on June 9. 
“The unhealthy banks should be brought down or some banks should be possible to chop up” so that the healthy parts continue and the rest ends in a so-called bad bank, Finnish Prime MinisterJyrki Katainensaid in an interview in Norway today. “There must be a possibility to restructure the banking sector because it doesn’t make sense to recapitalize banks which are not capable of running.” 
Spain this weekend became the fourth euro member to seek a bailout as the bloc’s finance ministers agreed to provide as much as 100 billion euros ($126 billion) to save the country’s banks. 
Katainen said today his government is unlikely to need collateral in exchange for its backing as the funds will probably come from the permanent European Stability Mechanism, which gives official creditors seniority over existing bondholders. 
“Hopefully the ESM will be in force” by the time Spain’s bailout funds start flowing, Katainen said. “It would be simpler and better in many ways and I have understood that the majority of the euro-area countries would support using the ESM instead of” the European Financial Stability Facility, which entitles Finland to collateral, he said.

Euro-area leaders have yet to announce which of the two funds will be used to pay for Spain’s loan. 
Granting the bailout “will take several weeks, as we need a very precise analysis on the condition of Spanish banks,” Finnish Finance Minister Jutta Urpilainen said on June 9. The ESM becomes effective next month....
A precise analysis that BlackRock Solutions will be only to happen to provide for a sizable fee.

Unfortunately, this is a precise analysis that is not worth the paper it is printed on as no market participant will believe it in the absence of ultra transparency under which the banks disclose their current asset, liability and off-balance sheet exposure details.

With this disclosure, market participants can independently assess the condition of each bank.  Without this disclosure, market participants know that the government, the EU and the banks are hiding something.

Since ultra transparency is ultimately needed, it makes sense to save money and skip the BlackRock Solutions evaluation and let the market determine exactly how big the shortfall is in the Spanish banking system for free.
Katainen also said he considers the supervision of Spain’s banks through the International Monetary Fund, the European Commission and the European Central Bank to be a precondition of the nation’s bailout.
A precondition that Spain has gone to great lengths to say isn't there.

However, with ultra transparency, the market will do a much better job of supervision than any of the Troika or Spain's regulators.

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