Spain’s banking system is in a fragile state. Already, bad property loans are threatening to bring the system down like a house of cards, while international pressure means that the government has little manoeuvrability to support the system if further disruptions occur. Needless to say, the Spanish government is desperate to have the banking sector solve its own problems without a bailout from either the state or the EU. But will this be possible?
On 25 April 2012, a team from the IMF issued a report on the Spanish financial sector, following inspections in February and earlier in April. The IMF also has a full "Article IV" discussion with Spain scheduled for late Spring 2012. Not surprisingly, the IMF found that the Spanish authorities were breaking a leg trying to get on top of the Spanish banking crisis.
"A major and welcome restructuring of the savings bank sector is taking place," the IMF says; but goes on to issue a restrained comment about the system as a whole being a mix of good and bad when it comes to the capacity to cope with adjustments...
"The largest banks appear sufficiently capitalized and have strong profitability to withstand a further deterioration of economic conditions, but vulnerabilities remain in other banks that are reliant on state support, and the sector as a whole remains vulnerable to sustained disruptions in funding markets," the IMF team say.
This will come as absolutely no surprise to anyone. The Spanish banking system as a whole is a basket case with bad property loans threatening to bring the whole house of cards down in spectacular fashion.
On April 16, Bloomberg ran an interview with Neil Mackinnon, a global macro strategist at VTB Capital in London, who cited a catalogue of problems that Spain is facing. The Spanish stock market is down some 15 percent; and by 23 April, it was having to pay over 6 percent for ten year bonds. The agriculture sector is facing its worst drought since 1947 and Spanish banks are stuffed with non-performing property loans.
On top of this, the Spanish Government, under pressure from the Germans and others, has committed itself to an unprecedented austerity regime, which will drive up the already extremely high rates of Spanish unemployment.
Related: Spain Economy
"Spain is looking more problematic and it is not clear if there are sufficient resources for Spain to be bailed out, which is why the (future of the eurozone) is up for debate. Fiscal austerity will worsen political and social tensions," Mackinnon warns.
The Spanish banks have been far and away the biggest borrowers of the ECB's Long Term Refinancing Operation (LTRO) and the markets have generally woken up to the fact that these banks are simply buying Spanish government bonds with the money, then offering those same bonds back to the ECB as collateral for the next round of LTRO money, which in turn will be spent on still more bond buying. To many this looks suspiciously like the ECB printing money by the back door in order to prop up failing EU member states in general, and Spain in particular.
John Markman, writing for the Wall Street Journal's marketwatch.com picks up on a survey of European banks carried out by the IMF, the results of which were published on 18 April. According to the IMF, European banks will need to shrink their combined balance sheets by as much as US$2.6 trillion through to the end of 2013. This amounts to around 7 percent of their assets that they are being asked to "lose".
A Reuters report on 25 April, pointed out that Spain's latest banking reform, introduced back in February, required banks to put aside around 54 billion worth of provisions to set against property losses. The Spanish government is desperate to have the banking sector solve its own problems without requiring either massive state aid, which the heavily indebted Spanish government cannot afford, or a direct bail out from the EU.
Reuters notes that there have been successes. Spain's second largest bank, BBVA has achieved in excess of the capital levels required by the European Banking Authority well ahead of the June 2012 deadline (9 percent core capital ratio). Overall though, Reuters said, Spanish bank bad loans had risen to 8.2 percent of total loans by February 2012.
The IMF team that visited Spain point out that the number of institutions in the Spanish financial system has shrunk from 45 to 11, through a variety of actions, including interventions, mergers and takeovers. As a result, by the end of 2012, the IMF says, institutions representing about 15 percent of the system, with total assets equivalent to more than half Spain's GDP, "will have been resolved".
According to the IMF, the Spanish authorities and regulators have the right "sense of urgency" about what needs to be done to restore market confidence in the country's banking system, and ultimately in Spain itself.
By Anthony Harrington
Anthony Harrington is an award-winning business and energy journalist, writing regularly for the Scotsman newspaper, the Glasgow Herald newspaper, Financial Director magazine, Pensions Insight magazine, CA Magazine, and a number of other publications. He won Business Finance Journalist of the Year 2006, Institute of Financial Accountants, and Journalist of the Year, State Street 2006 Institutional Press Awards, and was runner up in 2007 and 2008.
Rain in Spain falls mainly on the banks... is republished with permission from the QFinance Blog. Get the QFinance Dictionary of Business and Finance iOS app for a comprehensive guide to financial terms and expressions.