Printing Euros in Spain

There was a recent announcement that the central government will be arranging payment for suppliers to the local and municipal government that are owed money. There is a huge backlog of payments, sometimes as much as three years.

The magic involved is that these bills will be paid without increasing the deficit!

Wow! How is this possible? Where is the money coming from?

This is how its going to work:

• Company X is owed 100 euros. If they are willing to accept 90 euros, they will get paid first (this is crucial).
• The company takes its invoice to a bank and obtains a non-recourse loan (meaning if the loan isn’t paid, the only thing the bank can do is keep the collateral, ie the invoice).
• The central government stamps a “government guarantee” on the loan.
• This guarantee makes the loan eligible to be lent to the European Central Bank for three years via their LTRO program.
• In exchange, the ECB gives the bank 90% of the value of the loan in cash, which then get given to Company X.

Of course, in three years, the loan will have to be repaid (by the municipality first and then by the central government if there isn’t enough money), but until then it’s basically free cash.

Italy has already been doing this to a large extent, and my guess is that Greece has also been involved in this. If Greece has been using this trick to pay suppliers, then it will be impossible for Greece to actually default on their loans, since a default would make the government guarantee worthless, which would all of a sudden make the loans non-ECB compliant, and then the banks would have to quickly come up with a large amount of cash, which would probably start a chain reaction.