The banks affected are Santander, BBVA, Banesto, Unicaja, Caixa Bank, Caja Rural de Navarra, Popular, Sabadell, Banco Cooperativo Espanol, Bankinter, Caja Rural de Granada, Liberebank, Cajamar, Lico Leasing and Confederacion Espanola de Cajas de Ahorro.
The International Institute of Finance warned yesterday that Spanish bank losses on bad loans could be as high as €260bn, with up to €60bn of extra capital needed to shore up the country’s troubled banking system. Separately, El País reports that the European Commission will speed up the disbursement of €939m from the EU’s Cohesion Fund for infrastructure projects which have already been completed in Spain, but are still awaiting payment.
...and 4 Regions
The Agency has also reduced the credit rating of Catalonia from Baa3 to Ba1, Murcia from Baa2 to Ba1, Andalucia from A3 to Baa2 and Extremadura from A3 to Baa1.
Valencia (Ba2) and Castilla-La Mancha (Ba3) have had their credit ratings confirmed as ‘rubbish bonds.’
Doubling the rescue fund
An analysis by Deutsche Bank maintains that the Eurozone’s permanent bailout fund, the ESM, would have to be doubled to effectively shield Spain, Belgium and Italy from resorting to capital markets and to prolong the Irish and Portuguese programmes for three years in the event of a Greek exit. The Bank also argues that in order to reduce the risk of capital flight from Spain and Italy and to support their banks, the (ECB) will have to launch a renewed liquidity program.
Education on strike
The education sector went on strike on Tuesday, against the radical cuts made by the government. More than 7.5 million students, and 1 million workers were mobilised. The trade unions reported an 80% participation in the strike, the government said it was only 19%.
Bad loans 8.36%
Bank of Spain reports that at the end of March the percentage of bad loans in the Spanish financial institutions was 8,36% of total. Bad loans represent 147,968 million, up by 1,578 million on the previous month and the highest percentage of bad loans in the past 18 years.
Local rates up 10%
Half of the municipalities in Spain have increased the local rates 10% for 2012 and 2013. Many of them have also seen an increase in the cadastral values, the basis on which the charges are calculated.
Deficit for 2011 revised upwards
After finding 4 Regions had higher shortfalls than initially reported, the Ministry of Finance has been forced to revise the deficit for 2011, which now stands at 8.91%.
The two Regions upsetting the previous calculations are Madrid and Valencia, both governed by Partido Popular. The Madrid Region had to admit their deficit was not 1.13%, as reported previously, but 2.2. Valencia reported initially a regional debt of 3.68%, but had to admit in reality it was 4.5.
Changes in Ley de Suelo (Law on land use)
The Government is preparing changes in the Law on land use, to facility rehabilitation of dwellings on Building Land, and removing unjustified charges. Six million dwellings in urban areas are more than 50 years old, and may need to be upgraded, providing work for between 180,000 and 290,000 building workers.
Further fall in sale of dwellings
Sale of new dwellings in March, including government subsidised ones, fell 17.2% on the same month last year, to 25,000. During the boom years more than 80,000 dwellings were sold per month. The reduction on the VAT on dwellings from 8 to 4% has been unable to slow down the reduction in sales.
184,595 unsold dwellings in Valencia
The Valencia Region has 184,595, twenty three per cent, of all unsold new dwellings; Andalusia 131,872 and Castilla-La Mancha 87,331; Murcia 66,176; Madrid 54,234; Galicia 53,610 and Catalonia 48,932.
The number of unsold new dwellings in Spain (re-sales not included) is now 800,927. That is 10.8 times that in 2006, before the bubble burst.
The weekly crisis
Due to the economic situation and the possibility that it will have to ask for considerable financial assistance of its banks, the Rating Agency Egan Jones has reduced the rating of Spain from BB+ to BB- (rubbish)
Nobel prize winner Paul Krugmann considers there is no alternative to Greece leaving the Euro Zone
New French President Hollande has proposed to recapitalise the Spanish banks with European funds
Pablo Pardo, Deputy Bureau Chief of El Mundo (Spain’s largest daily newspaper) urges the Government to negotiate a rescue now, before the situation becomes impossible
Roland Berger and Oliver Wyman are the two auditing companies selected by the Government as independent auditors of the Spanish banking sector
It is estimated China has investments of between 235,000 and 470,000 million euros in European public bonds, but is now withdrawing from the southern countries to concentrate investments in the safer Germany
The Treasury placed a bond issue of 2,525 million euros in letters over 3 and 6 months, but at a higher interest rate than the last one
The high interest which Spain must pay on its bond issues is also affecting the financing of the Spanish companies. Telefonica is now having to pay 5.26% against 4.25% in February, and Iberdrola must offer an interest rate of
4.82%, up from 3.88 in February
The country risk of Spain has eased to 464 points in the hope that the EU summit on 22nd will assist Spain’s troubled economy. New French President Francoise Hollande has re-launched the idea of Euro Bonds, but Chancellor Angela Merkel of Germany is adamantly opposed
The OECD has proposed that Spain close down the banks which are not viable, maybe 30% of the total, and has drastically reduced Spain’s economic perspectives, estimating 1.6% recession this year and 0.8 in 2013
Thinking the unthinkable
By Per Svensson
Five years ago I warned that a property bubble existed and was about to burst, which would lead to a fall in property values of between 20 and 50%. All ‘experts,’ property agents, promoters, bankers and politicians shook their wise heads and wondered how someone could think such an impossible thing. Doom monger Svensson !
Today the bubble has burst and the explosion has literally wiped out the property sector, created 25% unemployment and misery for a large part of the population, brought property values down 30 to 60%, produced huge holes in the balance sheets of the banks and Public Administration, thrown an unable government out of office, and opened the gates of Spain to the international financial crisis…….
For the last couple of years I have warned Spain may go bankrupt, having to ask for assistance from the European Union, the European Central Bank and the World Bank to meet it’s commitments. In reality, as I have pointed out a couple of times, Spain has already reached this point, pleading with the European Central Bank to buy the high risk bonds which the Treasury must issue to finance an impressive debt.
The immediate future
With a country risk hovering around 500 points, an interest rate on 10 year bonds closer to 6 than 5% and an economy in recession, Spain may in the coming weeks be forced to ask formally for international intervention for itself or its banks.
There are some additional events that may accelerate the downward spiral of the spanish economy:
- The new audit of the situation in the Spanish banks, which has been demanded by the European Commission and that will be monitored by two capable, foreign audit companies, to find the real amount and market value of the property assets dragging down the financial sector.
- The new elections in Greece, taking place in less than one month, which may lead to an even firmer majority of the parties rejecting the Agreement with the ‘troika’ consisting of the European Commission (EC), the International Monetary Fund (IMF) and the European Central Bank (ECB), leaving the two former government parties which negotiated and approved the harsh agreement, in an embarrassing minority.
As we gets nearer to the elections, and the probable renouncement of a new Greek government of the agreement that the European leaders were sure would solve the financial crisis in the Euro Zone, the ‘Troika’ will feel less inclined to intervene in Spain.
Too big to be saved
It is one thing for Europe to save Greece, Ireland, Iceland and Portugal, but another to save Spain and Italy (Italy being close to the situation of Spain). Italy is the third largest economy in Europe, Spain the fourth. Several other European countries have problems of their own. Only Germany is going strong, but one country alone cannot save an economy like Spain’s.
Up to the Greek elections, and maybe also after, Spain will be under severe financial pressure, with a high country risk that the Spanish minister of finances last week assured was not sustainable.
It is probable that the Greek elections will give us a government repudiating the Agreement with the ‘Troika’ and thereby result in the exit of Greece from the Euro system.
We are coming closer and closer to a financial collapse, in Spain and in Europe.
Nightmare projections for Europe
By LANDON THOMAS Jr.
Published: May 20, 2012
LONDON — In a season of nightmare projections for Europe, this one could be the scariest: Greece leaves the euro currency union at the same time Spain’s banking system is collapsing.
In many ways, the market convulsion last week was a test run for those crises, as political deadlock in Greece and mounting fears over the health of Bankia, one of the largest consumer banks in Spain, converged. The credit ratings agency Moody’s Investors Service downgraded the entire Spanish banking sector Thursday.
As investors gird for another challenging week, they will be hoping European leaders in Brussels, if not Frankfurt where the European Central Bank is based, can finally start to map out an action plan. It is not clear that policy makers have many good options.
The money available to Europe within its main bailout fund, about €780 billion, or $997 billion, would not be enough to handle the twin calamities of a Greek euro exit and a Spanish banking implosion.
And despite recent statements from Germany and from leaders of the Group of 8 industrialized nations meeting in the United States over the weekend to encourage economic growth in the euro zone, the European tax-paying public may have little desire to continue financing the debt disasters of other countries.
“When you have Greece and Spain happening at the same time, the problem becomes exponential and very, very dangerous,” said Stephen Jen, a former economist at the International Monetary Fund who runs a hedge fund in London. “So far, the policy has been to buy time and build a firewall — but that just makes the cost bigger. There is just no good ending here.”
The numbers do look dire.
Stephane Deo, an economist at UBS, estimates that the cost of a Greek exit to European taxpayers would be €225 billion, assuming Greece defaulted on the money it now owes to European public institutions.
But, he says, the real fear is that while that was happening, the slow-motion collapse of Spanish banks from toxic real estate loans could suddenly turn into a fast-moving bank run, as depositors pulled out their money.
With Spanish banks now holding deposits of €2.3 trillion, such a loss of confidence could be disastrous for Spain and for the highly interconnected global banking system. The financial world’s assumption lately has been that it is sufficiently prepared to absorb the consequences of a Greek withdrawal from the euro. But if a Spanish banking collapse were factored in, Europe’s long-dreaded “Lehman moment” might finally arrive. “The scale is just so much bigger, when you talk about Spain,” Mr. Deo said.
Technocrats in Brussels will readily say that what is now keeping them up at night is Spain. They are trying to see beyond the tools that so far have kept a true crisis at bay: the two rounds of low-cost loans that the European Central Bank extended to commercial banks late last year and earlier this one, and the €780 billion bailout fund.
One potential new tool, according to Mr. Deo, would be for Europe to guarantee the bank deposits of at-risk countries like Spain. This would be similar to the way the U.S. government increased deposit insurance during the financial crisis in 2008 to head off a bank run. It would be an expensive undertaking, to be sure, and one that would have to be bankrolled largely by parsimonious Germany.
But such a drastic step might steel the shaky nerves of Spanish depositors.
Just such a step was briefly considered by European policy makers last year. But it was shelved on the assumption that North European taxpayers would not be inclined to back the banking system in Spain — or in Italy, whose own banks have still not regained a solid footing, or in other euro zone convalescents.
And without an allocation of new money, there could be no new guarantees for depositors. The total banking deposits in Spain, Italy, Portugal and Ireland are €5.5 trillion, or seven times the size of the main European rescue vehicle, the European Financial Stability Facility.
Reuters reported:
(Reuters) - Spain's borrowing costs shot up at a bond auction on Thursday and its troubled banks suffered a double blow, with shares in part-nationalized Bankia diving and 16 lenders - including the euro zone's biggest - having their credit ratings cut.
Official data confirmed Spain was back in recession and a newspaper reported a big outflow of deposits from Bankia, but the government said it had taken a fundamental step to strengthen Spain's credibility by agreeing big budget cuts with the country's free-spending regions.
Moody's Investors Service cut the long-term debt and deposit ratings of the 16 Spanish banks, including Banco Santander, the euro zone's largest, saying the government's ability to support some banks had weakened.
Spain's banks, saddled with bad loans after a property boom collapsed, lie at the heart of the euro zone crisis as markets fear any major rescue would strain Madrid's already stretched finances and possibly require an international bailout.
Gary Jenkins, credit analyst at Swordfish Research, said Spain had problems which went beyond the risk of contagion from the crisis in Greece, whose future in the euro is in doubt
"Whilst the attention of the world is on Greece, the fact is that Spain faces many challenges irrespective of how the Greek situation is finally resolved," he wrote in a note.
Moody's cut the rating of BBVA, Spain's second largest lender, as well as Santander even though both are generally regarded as sound, unlike some of their smaller peers.
Nicholas Spiro of Spiro Sovereign Strategy said the government of Prime Minister Mariano Rajoy was not handling the crisis well. "Sentiment towards Spain is deteriorating with each passing day, mainly because of a loss of confidence in the Rajoy government's approach to tackling the problems in the banking sector," he said.
ATTRACTING BUYERS
At Thursday's debt auction, the Treasury had to pay around 5 percent to attract buyers of three- and four-year bonds. The latter sold with a yield of 5.106 percent, way above the 3.374 percent the last time it was auctioned.
"This ... fits the pattern of recent sales, with the Spanish treasury successfully getting its supply away but at ever-higher yields," said Richard McGuire, rate strategist at Rabobank in London. "This unfavorable trend looks set to remain firmly in place ... Ultimately, this ratcheting up of yields will likely require some form of outside intervention."
Spain officially slipped into recession in the first quarter this year, final figures confirmed on Thursday, leaving the country threatened with a prolonged slump as the turbulent euro zone struggles to balance austerity with growth.
The European Commission warned last week that high debts of the 17 regions, which account for about half of overall public spending, and the welfare system would prevent Spain meeting its goal of cutting the budget deficit to 5.3 percent of gross domestic product this year from 8.5 percent in 2011.
However, the government said the regions - most of which missed their deficit targets last year - had agreed to cut their spending by 13 billion euros and increase revenues by 5 billion euros.
After weeks of negotiations, Treasury Minister Cristobal Montoro approved the plans presented by every region except for the small northern one of Asturias, which will have to produce a new budget within 15 days. "We've taken a fundamental step for Spain's credibility," Montoro told a news conference.
Overspending by the regions caused Spain to miss its deficit reduction target badly last year. Moody's agency downgraded on Thursday its ratings of four regions including two of the biggest, Catalonia and Andalucia.
Regions which meet their targets will get help from the state to cover their financing needs through a new mechanism which will be introduced by July. The government has been working for weeks on a new instrument called "hispanobonos" allowing the regions to issue debt underwritten by the Treasury.
WORRY LIST
Spain's 10-year debt yields have risen back above 6 percent, which investors view as a pivot point that could accelerate a climb to 7 percent, a cost of borrowing widely seen as unaffordable even though Madrid has raised well over half its needs for this year.
Prime Minister Mariano Rajoy said on Wednesday his government could soon find it difficult to fund itself affordably on the bond market unless the pressure eases.
However, the government source said the Treasury could refinance itself at the current high yields for several months, although the country saw it aiss vital that funding costs fall.
Top of the country's worry list is a banking sector beset by bad loans, the result of a property boom that bust in 2008.
El Mundo newspaper reported that customers at Bankia had taken out more than 1 billion euros, equivalent to around 1 percent of the lender's retail and corporate deposits, over the past week. The government denied there had been an exit of funds, but the bank's shares closed down 14 percent on Thursday on top of steep losses over the past week.
"It's not true that there is an exit of deposits at this moment from Bankia," said Economy Secretary Fernando Jimenez Latorre. Bankia itself said that deposit activity was normal.
The government last week took over Bankia, the fourth-largest lender which holds around 10 percent of Spanish deposits, in an attempt to dispel concerns over its ability to deal with losses related to the 2008 property crash.
"The majority of outflows came after the chairman resigned last week, but I think once the bank was taken over by the government, depositors calmed down a bit," said one Madrid-based trader. "The share price fall has to do with disappointed retail investors dumping the stock."
Some savers were reassured by the deposit guarantee fund which covers 100,000 euros per customer.
"I have two accounts with Bankia and up to now I have not closed them. I'm not even considering it," said Jose Ignacio Gonzalez, 42. "It must be more secure with the backing of the state, it has a guarantee."
The problem for Madrid is that the property losses which banks face are not yet quantifiable, as prices are likely to fall further.
The government told the banking sector last week to set aside another 30 billion euros in provisions, prompting some analysts to say much more would need to be done.
RECESSION AND CONTAGION
While Greece, facing fresh elections which could hasten its exit from the euro zone, has dominated headlines, uncertainty over the final cost of Spain's banking reform has raised the prospect that it could also require an international bailout, a bill the euro zone would be stretched to cover.
Official data confirmed the Spanish economy shrank 0.3 percent in the first quarter, putting it back into recession. Unemployment is already running close to 25 percent, rising to around 50 percent among the young.
Even if it puts its house in order, Madrid faces the threat of contagion from Greece if it elects an anti-bailout government next month, a move which could hasten a hard default and exit from the euro zone.
"It's not Greece leaving the euro that is the major issue," said John Bearman, chief investment officer at Thomas Miller Investment, which manages roughly 3 billion pounds ($4.8 billion) of assets. "It's the domino effect."
As its banking woes mount, Spain ponders where to go from here
Its banks struggling, Spain has moved closer to needing a bailout. But some argue the takeover of Bankia and other measures could mark the beginning of movement toward greater stability.
By Andrés Cala, May 18, 2012
When Spain’s government nationalized the Bankia bank last week, it set off a spiraling economic debacle that has brought the country to the brink of an embarrassing bailout. But some say the move could mark the beginning of the end of the painful economic crisis, because Spain can start recovering after hitting bottom or accept a plan to rescue its financial system.
“From a macroeconomic point of view, I think the Bankia crisis has to be understood as another stage, not the final one, to stabilize Spain’s financial system and to cleanse the real estate bubble,” says Josep Oliver, applied economics professor in the Universidad Autónoma de Barcelona. “It’s hurting many people, but this could actually be positive if this is the last chapter ... if we come out and everyone is convinced the contingencies are in place for worst-case scenarios, that the banks won’t be allowed to keep doing what they did, and that the resources will be made available somehow."
The crisis in the country's No. 4 bank is also Spain’s crisis. It’s rooted in the bursting real estate bubble in 2008, declining economic growth at home and globally, and unemployment that has hit 24 percent. Government efforts to reform banks' questionable practices were insufficient, designed more as temporary measures to win some time while the economy recovered. But it got worse, and European institutions, the International Monetary Fund, ratings agencies, and economists have long warned that the system would have to be cleansed sooner or later.
“Much of what we see in the banking sector is at least morally questionable," says Dr. Oliver. But, he adds, "the banks didn’t do it alone. The entire country mortgaged its future, not banks. We have to accept that we all went wrong, as a country.”
A crisis foretold
Bankia was born out of the merger of seven savings banks in the first financial reform in 2010, most of them indirectly controlled by the conservative Popular Party currently in power.
But their books, like those of most savings banks in Spain, were plagued with bad debts, not of homeowners, but of construction companies that went bankrupt when real estate collapsed. Bankia held 32 billion euros in real estate toxic assets.
The government-controlled board named Rodrigo Rato, a former IMF managing director, as well as former economic minister and vice-president of Spain with close ties to the ruling party, as chairman, and the bank went public in July 2011.
But the bank was crippled by huge losses from its credit business. When more recently the Spanish government tightened bank regulations to increase contingencies to cover toxic debts, Bankia could no longer hold out.
On May 7, the conservative government forced the resignation of Mr. Rato, and two days later it partially nationalized the bank. With new leadership, Bankia announced it would recast its 2011 results.
Bankia’s stock has lost around half of its value since, and it has dragged the shares of the entire financial sector, along with the country’s biggest companies, to almost decade lows.
The financial woes that will inevitably take billions to bail out, along with a shrinking economy and rising unemployment, pushed the cost of borrowing of Spain to a euro-era record high, to levels close to those of Greece, Portugal, and Ireland before they were bailed out.
Spain – echoing other countries that are now under international supervision – insists it won’t need to be rescued by its European peers.
Stock holders and clients of Bankia are both accusing the bank of fraud and the government of ineptitude. Worse, there are rumors of runs on banks that have diminished the little confidence that remained of a quick exit out of the crisis.
What’s next?
Bankia’s future is uncertain, although most see a similar bank failure in the 1990s as a precedent, and would involve breaking the bank into pieces and auctioning it off. Spain’s biggest banks, Santander and BBVA, which operate in Asia, America, and Europe, are struggling, but they are not as exposed to toxic assets and are significantly more capitalized to survive the storm.
But the bigger issue is Spain’s broader economic woes. Credit dried out years ago, the economy is in recession and will remain so for some time, unemployment is rising, and the government is implementing the biggest cuts in public spending in history, on top of those implemented by the previous government.
The government Friday for a second time this year announced a revision of the country's 2011 deficit as a percent of GDP after regional governments – controlled by the ruling party – reported much wider shortfalls.
The cost of borrowing for Spain also rose 25 percent this week in tandem with Bankia's troubles since last week. Lenders are asking Spain for almost 7 percent to lend it money in the form of 10-year sovereign bonds, an unsustainable rate if it holds for a long period that would inevitably trigger a bailout.
Spain, though, can do very little. Without more economic growth in Europe, without a clear exit strategy for the continent’s troubled economies, starting with Greece, there is little that can be done.
Spain needs affordable credit to recapitalize and secure its banks, but its troubled financial sector, coupled with European uncertainty, make that an unrealistic scenario. Without money, credit won’t trickle down, the economy will continue contracting and unemployment will continue rising, in a vicious circle that most can diagnose, but few can offer a solution for.
“I think the government acted responsibly [with the Bankia takeover]. With all this behind us, Spain can attract more credit, just like it happened in the US, the UK, and other European countries,” Dr. Oliver says. “But this is not just the banks. It’s all of us.”
Could Spain Be the Next Domino to Fall?
By Joe Ortiz, Bloomberg
What’s happening in Spain is starting to look like a perfect storm and there seems to be very little the government can do about it.
All that Prime Minister Mariano Rajoy’s administration can hope is that the external situation improves and, somehow, Greece’s membership of the euro zone can be maintained.
Otherwise markets will come looking for the next domino.
Weakness in stock prices is mostly down to global economic risk, rather than micro factors. If Spain goes under, Italy will follow and Germany will be the last man standing.
Take a bearish — you could call it realistic — stance on Spain and look at how the fourth-largest euro zone economy could fare under a stress scenario.
According to the World Bank, the amount of GDP that Spain produced in 1999 ($617 billion) is some 52% of today’s figure ($1.4 trillion). If all the value, or growth, that has been created in the last decade is to evaporate, slowly but steadily over time, the pain could be immense.
Assuming Spain reaches a 1999-2012 mid-point GDP of about €840 billion, another 23% drop must be factored in, yielding a normalized contraction of above 2% for 10 years in a row. Austerity measures won’t stop the bleeding.
Then the biggest fear: contagion. On an unprecedented scale.
Spain’s government has been engaged in a Sisyphean labor since it took office, instituting a piecemeal reform which has the markets constantly guessing about what they might do next.
A crucial example of this is the reform of the banking system or, at least, that’s what they call it. Perhaps, shoring up would be more accurate.
First, in February, the government told the banks they must increase provisions on bad real-estate loans by about €30 billion by the end of 2012. Banks that participate in the consolidation of the sector were given an extra year to meet the new rules.
Nobody thinks this is enough and, in the meantime, Bankia, Spain’s fourth largest bank, is in trouble after its auditor refuses to sign-off on its accounts. Cue the resignation of its CEO Rodrigo Rato on May 7, one of Spain’s few truly international financial heavyweights, and a plan for €4.6 billion of government aid to be converted to equity and for the state to be the effective owner of 45% of Bankia.
That was followed by the second installment of bad debt recognition forced on banks. This time, they were forced to provide for loans that hadn’t even gone bad yet, a perfectly normal occurrence in banking.
Putting a positive slant on it, these were major steps on the way to cleaning up the Spanish banking system but given the fact that market confidence was rapidly disappearing down the tube, everything the government does looks like too little too late. At the same time, the Bank of Spain, which in theory regulates Spanish banking, has been completely undermined.
And still it’s not enough. Outside agencies have been hired to value the loan portfolios of Spanish banks. When they did that in Ireland, it led to another ratcheting up in provisions. In Spain, it’s very likely that the Bank of Spain will have underestimated the potential losses under stress scenarios.
It’s a far cry from that period after the financial crisis broke when Spanish banks were credited with having come through the credit crunch well and the central bank reaped praise for its prudent provisioning policy.
That feels like decades ago.
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