The
Market Calls BS on Spain’s Efforts to Cover Its Toxic
Banking Debt
May 1, 2012 By gpc1981
http://albertpeia.com/spainstoxicbankingdebt.htm
‘In a
previous article I began delving into the toxic sewer that is the Spanish
banking system. At the root of the problem is the previously unregulated
Spanish cajas or regional/ local banks which own as
much as 56% of all Spanish mortgages.
To give you
an idea of how bad things are with the cajas,
consider that in February 2011 the Spanish Government implemented legislation
demanding all Spanish banks have equity equal to 8% of their “risk-weighted
assets.” Those banks that failed to meet this requirement had to either merge
with larger banks or
face partial nationalization.
The
deadline for meeting this capital request was September 2011. Between February 2011 and September
2011, the number of cajas has in
Put another
way, over 60% of cajas could not meet the capital
requirements of having equity equal to just 8% of their risk-weighted assets.
As a result, 28 toxic caja balance sheets have been
merged with other (likely equally troubled) banks or have been shifted onto the
public’s balance sheet via partial nationalization.
The markets
are well aware that this policy has only spread the toxic garbage, not fixed it. Case in point,
take a look at the chart for Banco
The merger
increased Banco
Banco Popular, which acquired failing caja
Banco Pastor, has experienced a similar fate, falling
to a new low soon after the merger:
My point
with all of this is that merging one garbage bank with another larger slightly
less garbage bank doesn’t solve anything. The market knows this, which is why
we see these banks continuing to collapse despite being merged.
Having
addressed all of this, I firmly believe that no one, not even the Spanish
Government has a clue how much toxic garbage debt exists in the Spanish banking
system.
Moreover,
it’s not as though the Spanish Government is heavily incentivized to come clean
about the true
nature of the Spanish banking system even if it did know the facts.
Case in
point, the Government just admitted that Spanish banks will need another €29
billion in loan loss provisions yesterday, before revealing that “problem
loans” for the Spanish banking system are now at an 18-year high of 8.15% (€140
billion of the total €1.7 trillion in loans within the Spanish Banking System).
Put another
way, by the Spanish Government’s own admission (read extremely conservative
estimate) nearly one out of every €10 leant out by Spanish banks is probably
not going to be paid back.
And things
are only going to get worse. Spanish citizens (at least those that have money)
have been pulling their money out of
This flight
of capital will result in higher leverage levels for Spanish banks (already
leveraged at 20 to 1) and smaller capital buffers with which to address future
losses.
Put another
way, capital is leaving
Simply put,
Spain’s banking system is an absolute sewer of toxic debts that no one, likely
not even the Spanish Government or Spanish Central Bank, truly has a grip on.
The few
facts that we do know are:
Total Spanish banking loans are equal to 170% of Spanish GDP.
Troubled loans at Spanish Banks just hit an 18-year high.
Spanish Banks are drawing a record €316.3 billion from the ECB (up
from €169.2 billion in February).
The share prices of Spanish banks that were merged with cajas have broken to new lows.
None of
this is good news at all. Especially when you also consider that…
Spanish
banks need to roll over 20% of their debt this year.
That’s
correct, one fifth of all Spanish bank bonds need to be paid off or
renegotiated in 2012. And this is happening at a time in which Spanish interest
rates are rising. Indeed, the Spanish ten year is approaching the dreaded 7%:
the level at which
The only
problem is:
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Best
Regards, Graham Summers,Chief
Market Strategist,