Spanish Guarantee Scheme for Credit Institutions

Other interventions, implemented independently throughout an extended period spanning from late 2008 through 2014, included the creation of a fund for the acquisition of failing assets and a comprehensive recapitalization scheme for many major Spanish banks and credit institutions. A majority of the later actions were taken in response to deteriorating conditions exacerbated by the Eurozone crisis. 

On October 13, 2008, the Spanish Ministry of Economy and Finance proposed the Guarantee Scheme in its adoption of the Royal Decree-Law 7/2008 of October 13 on “Urgent Economic and Financial Measures in relation to the Concerted Action Plan in the Euro Zone.” The Ministerial Order EHA/3364/2008 for the granting of State guarantees was then adopted on November 21, 2008, published on November 24, 2008, and amended and signed into force in its final form on December 29, 2008.

The European Commission authorized the passage of Ministerial Order EHA/3364/2008 on December 23, 2008. As discussed in more detail below, the need to structure the Guarantee Scheme in such a way as to ensure EC approval significantly influenced the design of certain program features.

This amount could be increased to €200 billion “if the Spanish authorities consider it necessary given market conditions” (European Commission 2008b). These funds were to be drawn down from and distributed equally over the Spanish government’s annual budget for 2008 and 2009, according to the General Budget Law. In 2009, the overall budget was adjusted to €164 billion for 2008 and 2009 pursuant to Royal Decree Law 9/2009.

Applicants to the program needed to receive explicit approval from the Directorate General of the Treasury and Financial Policy.

Subsidiaries of foreign credit institutions were also eligible for participation in the Guarantee Scheme but were subject to the same regulations as those registered in Spain. The Guarantee Scheme excluded branches of foreign credit institutions.

Credit institutions had to meet specific market share, issuance, and capitalization requirements in order to be fully eligible for the Guarantee Scheme. Each credit institution, or at least one subsidiary of a consolidated group or pool of credit institutions, had to meet the following criteria:                     

• Possess a share equal to at least 1/1000 of the domestic credit market;
• Have issued, since October 13, 2003 (five years before the entry into force of the Royal Decree-Law), instruments “similar to the ones covered by the present Guarantee Scheme” (European Commission 2008b).

Regardless of type, credit institutions needed to be “sufficiently capitalized in line with the national legislation.”^FAccording to Law 36/2007, dated November 16, 2007, modifying Law 13/1985, dated May 25 ,1985, and Royal Decree 216/2008, dated February 15, 2008.

Securitization notes and subordinated debts were not eligible. The original Royal Decree-Law initially provided for the possibility of covering other financial instruments such as interbank deposits. However, Ministerial Order EHA/3364/2008—which held legal force and upon which the European Commission based its authorization—excluded interbank deposits, options, derivatives, and other instruments “for which the amount of risk might be difficult to assess by the guarantor” (European Commission 2008b). There was a minimum issuance requirement for all debt issuances of €10 million.

Initially, debt with a maturity of up to five years could be guaranteed by the government only subject to European Commission approval based on a specific request and report from the Bank of Spain.

In 2009, Spain requested that the European Commission extend guarantees for debt with maturities of up to five years. The Commission approved the measure but limited these issuances to a maximum of one-third of the overall budget. 

Though not explicitly stated in the implementation documents, the original Ministerial Order stipulated that if the debt were to be denominated in foreign currency, “the order of granting the guarantee will establish mechanisms to minimize the foreign currency risk the State might take” (European Commission 2008b).

This provision^FAs defined in epigraph 2.4 of the Statistic Bulletin from the Bank of Spain, September 2008. applied to participating credit institutions, consolidated groups, or pools. In accordance with Article 118 of Law 47/2003 of November 2003, the Ministry reserved the right to “limit the amount [of guaranteed debt] to reduce the risk involved with granting the guarantee,” particularly with regard to the capitalization requirements used to determine an institution’s eligibility (European Commission 2008b).

The guarantee fee was determined according to the guidelines presented in the European Central Bank’s “Recommendations on government guarantees on bank debt” of October 20, 2008 (European Central Bank 2008). Fees were to be paid to the Spanish government by participating institutions upon each issuance of guaranteed debt. Debt issuances with a maturity of a year or less incurred a fixed annual guarantee premium of 50 basis points (bps) calculated on the nominal value. Those issuances with maturities of more than a year incurred a fixed annual fee of 50 bps “plus the variable fee corresponding to the relevant credit default swap,” to be calculated as follows:

1. 1. For credit institutions with representative CDS, the fee was the lower of either:
      1. The median value of the five-year CDS spread for the credit institution during the period between January 1, 2007, and August 31, 2008; or
      2. The median value of the five-year CDS spread during the same period, “depending on the relevant rating category of the bank concerned based on a representative sample of large banks in the eurozone” (European Commission 2008b). For a rating of double-A, the median was set at 36.5 bps; for a rating of single-A, the median was set at 44.8 bps.
   2. For credit institutions with a credit rating but no representative CDS spread, the debt issuance incurred a fee based on the median value of the five-year CDS spread for institutions with similar credit ratings  during the period between January 1, 2007, and August 31, 2008, depending on the relevant rating category. For a rating of double-A, the median was set at 36.5 bps; for a rating of single-A, the median was set at 44.8 bps.
   3. For credit institutions with neither representative CDS nor a credit rating, the debt issuance incurred a fee based on the median value of the five-year CDS spread for the lowest rating category during the period between January 1, 2007, and August 31, 2008. The median for the lowest rating category of single-A was set to 44.8 bps, plus an annual add-on fee of 10 bps.

In 2010, these fees were increased pursuant to new guidance from the European Commission as follows:

1. 20 bps for institutions with a rating of A-plus or single-A,
2. 30 bps for institutions with a rating of A-minus,
3. 40 bps for institutions with a rating of lower than A-minus .

This increase in fees aimed to incentivize beneficiaries to scale down their guarantees or exit the program.

Program documents do not contain any such restrictions.

Embodied in Article 1.830 of the Spanish Civil Code, the beneficium excussionis “refers to the right or benefit of the guarantor not to be compelled to pay as long as the principal has enough property” (European Commission 2008b). Had such a provision remained in effect, investors holding guaranteed debt may have been required to pursue a claim against a defaulting issuer prior to realizing the guarantee. The waiver of beneficium excussionis thus provided holders of guaranteed debt with confidence that they would be able to trigger the guarantee more quickly in the event of default.

Although the original Ministerial Order EHA/3364/2008 specified an end date of June 30, 2009, the program was extended five times, each for a period of six months, to expire on December 31, 2011 (see Appendix A). This was due to the perceived weakness of the Spanish savings bank sector and the previous heavy investment in the failing housing market.

The Guarantee Scheme was reintroduced for a six-month period with slightly different terms in February 2012. This second iteration of the program was extended in June 2012 to February 2013 and ultimately concluded on June 30, 2013 (see Appendix B).