Let’s consider the recent happenings in Spain:
Spanish banks’ bad loans hits 18-year high
Published 11:58 PM, 18 Apr 2012 Last update 5:06 AM, 19 Apr 2012
The ratio of bad loans at Spanish banks shot to an 18-year high in February, official figures showed Wednesday, as the banks struggled with a mass of deteriorating property-related loans.
Spanish banks are a key concern on financial markets because of the declining value of the huge loans they allowed to build up during a property bubble that collapsed in 2008.
Doubtful loans in February amounted to €143.8 billion ($188 billion), rising to 8.15 per cent of total credits – the highest ratio since 1994 – from 7.91 per cent in January, the Bank of Spain said.
A loan is categorised as doubtful when the borrower has not made a payment for at least three months.
Prime Minister Mariano Rajoy’s conservative government has made cleaning up the banks a priority and is requiring them to set aside more than €50 billion to boost their balance sheets.
The Bank of Spain approved the plan Tuesday, obliging banks to allocate 29 billion euros to bad loan provisions and €15.6 billion to raise the proportion of rock-solid core capital.
Those sums are in addition to €9.2 billion in provisions already set aside by the banks last year, bringing the total in extra capital to €53.8 billion.
Banks are being told to find the money for the new provisions from their own profits or by issuing new shares, although the central bank has not ruled out state intervention.
The new, tougher balance sheet requirements must be met within one year, or two years for banks undergoing mergers.
Many analysts doubt, however, that the new rules will be enough, warning that the real bad loan figures may be far worse because banks are reluctant to fully realise the declining value of their loans.
As banks stagger under the bad loans, businesses widely report that new credit is hard to come by.
Spain’s banks turned in huge numbers to the European Central Bank, which has offered more than one trillion euros in cheap three-year loans to eurozone banks.
Borrowing by Spanish banks from the ECB hit a new record in March at €227.6 billion, up from €152.4 billion euros in February and €133.2 billion in January.
Much of that money, however, has been invested in Spanish government bonds instead of loans to business.
The Bank of Spain estimated that the total value of banks’ problematic loans, the value of which is uncertain, amounted to €176 billion in June 2011, the latest date for which those figures are available.
And that’s bad news for the ten-year bond sale in Spain tomorrow:
Investors fret ahead of key Spanish bond auction
By David Williams | AFP – 2 hrs 33 mins ago.
Investors showed deep concern ahead of a Spanish government bond auction due Thursday, fearing Madrid could be thrown back into the centre of the eurozone debt crisis.
Markets have punished Spain sharply since an April 4 government bond auction drew only feeble interest, with the state barely raising the minimum amount targetted.
That weak sale, coming shortly after the government unveiled an austerity budget with spending cuts and tax increases of 27 billion euros ($35 billion), reawakened doubts over the sustainability of Spain’s financing.
A similar result Thursday, when the Treasury aims to raise 1.5-2.5 billion euros, could compound concerns that Spain might end up needing the kind of a debt bailout already afforded to fellow eurozone strugglers Greece, Ireland and neighbouring Portugal.
“Investors remain nervous ahead of tomorrow’s 10-year Spanish bond auction,” said equities analyst David Morrison at trading group GFT in London.
“If yields jump back over 6.0 percent, then the European debt crisis will return centre stage, with Spain the leading lady.”
Spain’s bad debt is actually higher than it’s good debt. And this in the fourth largest economy in Europe and the twelfth largest economy on the planet.
And then there’s the rather bad predictions – especially given the fact that a Spanish bailout will massively dwarf the pain and fear created by the Greek collapse:
“Not if, but when” for Spanish bailout, experts believe
By Luke Baker
BRUSSELS | Wed Apr 18, 2012 5:54am EDT
BRUSSELS (Reuters) – Economic experts watching Spain don’t know how much money will be needed or precisely when, but some are near certain that Madrid will eventually seek a multi-billion euro bailout for its banks, and perhaps even for the state itself.
Prime Minister Mariano Rajoy has repeatedly said Spain doesn’t need or want an international bailout, and the European Union, which along with the IMF has already rescued Greece, Ireland and Portugal, also dismisses such talk.
But economists believe that Spanish banks will have to turn to the euro zone’s rescue fund, the European Financial Stability Facility (EFSF), for help in covering losses caused by a property market crash which has yet to end.
Likewise, investors are fretting about how Rajoy’s centre-right government can enforce deep austerity while reviving a recession-bound economy at the same time.
“They’re going to need EFSF money to recapitalize the banking sector,” said Carsten Brzeski, a senior economist at ING in Brussels. “I think we’ll only see a real end to the Spanish misery if the real estate market stabilizes.”
Madrid is likely to hold out for some time. “The underlying picture in Spain is dramatic, but is it dramatic in the way that it needs a bailout package tomorrow? No,” Brzeski said. “But if you look ahead, let’s say the next six months, I would not be surprised if they (the banks) have to get some kind of European support.”
Market concerns about the euro zone’s fourth largest economy have deepened in the past week. Yields on the government’s 10-year bonds, which reflect the risk investors attach to owning Spanish debt, have risen above 6 percent, a level that has proved a trigger point for other troubled euro zone countries.
At the moment the EU is backing Madrid. Jean-Claude Juncker, who chairs the Eurogroup of euro zone finance ministers, said Spain was taking the necessary steps to get its economy back on track, despite a recession and unemployment at 24 percent.
“I don’t think Spain will need any kind of external support,” Juncker said. “I would like to invite financial markets to behave in a rational way. Spain is on track.”
German Finance Minister Wolfgang Schaeuble also rejected comparisons with countries which are already on bailout programs. “The fundamental data in Spain is not comparable to those in the countries that are under a program,” he told Reuters. “Spain needs to work to win confidence, however, if the positive developments are to continue.”
Markets took fright earlier in the year when Rajoy relaxed his government’s targets for cutting the budget deficit.
However, not all economists are so pessimistic and some say the four-month-old government is starting to knuckle down to meeting the new targets, which still demand deeply unpopular austerity, and tackling the economy’s structural problems.
“We’ve seen more progress in a few days than in four months,” said Gilles Moec, a Deutsche Bank economist. “It’s a country that’s intrinsically sustainable, but it’s a country that needs to make decisions.”
Others beg to differ and fear Spain will drag in Italy, which has suffered similar problems with rising borrowing costs.
“As I look at my screen and Spain 10-year yields are up at 6 percent – things are starting to get worrying again,” said Peter Westaway, chief economist for Europe at Vanguard, an investment management firm overseeing $1.8 trillion in assets.
“If they go up to 6.5 to 7 percent, that could become very problematic, and if Italy started to go back above Spain again, then that would be really serious.”
Spain has one thing on its side. It has already raised nearly half the 86 billion euros it needs to borrow from financial markets this year, sucking up some of the 1 trillion euros of cheap three-year loans that the European Central Bank has pumped into the euro zone banking sector.
This means the government could hang on for months before having to turn to the EU for help with its own funding needs.
A 380 BILLION EURO PROBLEM
However, that still leaves the banks. One of the critical “unknowables’ for Spain is just how bad a situation its banks are in. The Spanish housing market, once a driver of the economy, has been in turmoil for more than four years, but prices still haven’t fallen as much as economists think is needed to squeeze the air out of the bubble.
Only when prices have bottomed will assessors be able to calculate how just much bad mortgage debt is sitting on the banks’ balance sheets, and therefore how much extra capital the sector requires to return it to health.
“Prices have dropped by about 15-20 percent from peak to now and they will probably have to drop another 15-20 percent before they reach bottom,” said Brzeski. He estimates Spanish banks may need as much as 80 billion euros of extra capital once all bad mortgage debt is accounted for.
In a paper published this week, Daniel Gros and Cinzia Alcidi of the Centre for European Policy Studies estimated that the total accumulated overhang in the Spanish property and construction sector is more than 380 billion euros – equivalent to 37 percent of GDP. (here)
“A housing overhang per se does not have to lead to an acute financial crisis if it was financed by domestic savings,” they write. “Unfortunately this is not the case in Spain.”
As a result, economists expect Spain’s banking sector will have no choice but to recapitalize.
The government is unlikely to fund such an operation while it is trying to slash the budget deficit, and private investors are reluctant to invest in such a troubled sector.
That leaves the European Financial Stability Facility as the most likely option for the banks – and possibly also for the government eventually.
“Spain is not going to run out of cash (yet) and it’s pre-funded its borrowing requirement,” said Megan Greene, a senior economist and euro zone specialist at Roubini Global Economics. But she added: “There’s a chance that the banking bailout could come sooner, but I really think it’s going to be next year.”
Even if it does hang on until 2013, Greene still expects Spain to need both a banking and a sovereign bailout – a program similar to that provided to Ireland or Greece.
“The banking sector is only one piece of the puzzle in Spain,” she said. “A banking bailout could deal with one part of the problem, but eventually the sovereign is going to need a bailout too.”
WHAT TO DO WITH ITALY
Doubts persist that the euro zone is any better placed to handle a rescue of Spain than it was two years ago, despite having already bailed out the three other countries and having set up an 800 billion euro fund to tackle the problems ravaging the region’s economy.
“When it comes to deciding how to deal with Spain, I really think they are back to the drawing board,” said Greene. “They basically haven’t learnt anything from the first three bailouts.”
Then the problem for euro zone policymakers will be what to do about Italy, the eighth largest economy in the world, with GDP 50 percent larger than Spain’s.
For months, Spanish government bond yields and those in Italy have moved in near lock-step, reflecting the twinned risk investors see in both southern European states.
“Spain and Italy are inextricably tied,” said Greene. “If Spain gets a bailout then the EU needs to be ready to provide support to Italy too.”
Did somebody say Italy? Italy is the 8th largest economy on the planet and is half again bigger than Spain – and an Italian debt failure would be economic Armageddon.
Italy to miss budget aims, says IMF
Tuesday 17th April 2012, 8:00PM BST.
The International Monetary Fund is predicting that Italy will miss its budget deficit targets this year and next and will not balance its budget until at least 2018 – some five years later than government estimates.
In a report, the IMF said Italy would trim its budget deficit only to 1.5% of its output next year. Premier Mario Monti has promised to balance the budget by 2013, a centrepiece of his efforts to steer Italy out of its debt crisis.
The IMF however predicted that Italy would still carry a 1.1% deficit in 2017, the last year for which it made estimates.
Italy is due to publish its own revised economic figures on Wednesday.
Meanwhile, following Greece’s recent second bailout (because the first one ended in colossal failure with the Greek debt being like a black hole), things aren’t so rosy already:
March 16th, 2012
Oh no…the Greek bail-out is still not enough?
Posted by: CNN Anchor and Correspondent, Richard Quest
London (CNN) – The bail-out is a done deal, the International Monetary Fund has agreed its share and the Europeans have started to hand over the money. One of the ratings agencies has even upgraded the new Greek bonds.
So it is incredibly dispiriting to be reading more and more notes from economists and analysts suggesting that this is not over yet.
Paul Donovan, in his note from UBS, noted that the markets were not that impressed by the state of play. The markets, he said, were pricing in “the debate about when the next restructuring will take place.”
According to Societe Generale, it is “only a matter of time before Greece will need an additional package.” Citigroup reflects the same view, noting: “In our view, Greece requires further official funding beyond at least 2014, and we also see the need of further debt restructuring in order to get the country back on a sustainable fiscal path.”
It gets worse with the prognosis “the risk of Greece exiting the euro area remains elevated (around 50%).”
Hang on. “Next restructuring?” and “further debt restructuring?” What on earth have we been going through for the past three months if this isn’t going to solve the Greece problem once and for all?
You would be forgiven for a certain incredulity, given that no sooner is the ink dry on the checks being sent to Athens than the economists who know about these things say it’s not enough.
This is made all the more likely by European politicians who continue to call for even more austerity in Greece. This lemon is just about squeezed out, and if they don’t want to be facing riot and mayhem they would do well to recognize this.
This comes as Iceland announced it is paying back 20% of its IMF loans early. Yes….I said early. Iceland. Which also introduced austerity and borrowed money but – notably – let the banks go bust.
No one ever said going bankrupt was easy, but it still may have been the best solution for Greece rather than this messy, half-baked solution we are now witnessing.
If you do an internet search for “Greek bailout,” you’ll get a sea of optimistic-toned stories saying everything will be wonderful and then suddenly nothing. And “nothing” means that things are starting to suck and liberals don’t want to talk about it.
At this point, Europe is so broken that nothing will do any good. You hear all the whining about austerity cuts and how it will impact growth; but if they don’t do the austerity cuts absolute implosion and Great Depression is a 100 percent guarantee.
And we’ll be there real soon thanks to hopey-changey Barry Obamy.