The full extent of the huge problems facing Spains banks is becoming embarrassingly clear while the sovereign debt market continues to punish recession-hit Spain, making it still more difficult for the government to raise money to bail them out. Bank recapitalizations could amount to as much as 100 billion ($124 billion), according to some analysts. On May 30 the yield on Spains 10-year bond climbed a further 21 basis points to 6.66 percent, close to the 7 percent level which is widely regarded as unsustainable, before falling back on the afternoon of May 31 to 6.45 percent, even as Spains Economy Minister Luis de Guindos insisted the government would foot the growing bill for the banks. Both he and the European Central Bank denied rumors that the latter would indirectly help to fund a recapitalization of Bankia, the countrys fourth-biggest bank by assets.
Spains banks will have write down many more billions of euros of their loans to the real estate sector, according to a senior Spanish expert on the market. So far Spains banks have identified 184 billion of problem and nonperforming loans in their total exposure to real estate developers of 307 billion. But Mikel Echavarren, chairman of the Madrid-based real estate advisory firm Irea says, Its impossible that 120 billion of the loans to real estate developers are performing. We estimate, based on our work with more than 80 corporations, that perhaps 40 or 50 billion are performing loans. He says, The Bank of Spains rules on valuing real estate loans are flawed. Banks are asked to assess the value of the collateral the land or the buildings without reference to the actual ability of the developers to repay the loans at a time when there are few buyers for that collateral. Nor have problem loans in the banks total private sector loan book of 1.8 trillion been properly assessed, he says. As Oliver Burrows, senior credit analyst at Rabobank in London, says, There has been a lack of transparency throughout. Ireland admitted its problems at a much earlier stage.
And market conditions are deteriorating steadily as the government struggles to cut its budget deficit from 8.9 percent of GDP in 2011 down to below 3 percent by 2013. GDP is expected by the European Union to contract by 1.8 percent this year, and by 0.3 percent in 2013. There is very little prospect of the outlook improving, least of all in real estate. Echavarren says, In our refinancing advisory work, we see very little new money going in. Real estate companies are simply selling collateral to the banks or asking for extra time that will not solve their problems.
The government mandated strategic consultants Roland Berger and Oliver Wyman earlier this month to carry out stress on the banks and will also hire audit firms to assess their balance sheets. The markets had initially been reassured by this move but, on May 25, Bankia restated its 2011 results and declared it needed a capital injection of 19 billion in addition to the 4.5 billion already invested by the state. Its share price had plunged to 1.04 by close on May 30, representing a fall of nearly 40 percent in a week, and 60 percent over a period of four weeks.
Burrows of Rabobank estimates that the Spanish banking sector needs a total recapitalization of 101 billion over the next two years given its real estate exposure. Steve Hussey, banks analyst, at asset management firm AllianceBernstein in London, is marginally more sanguine, estimating a total recapitalization of 70 billion to 100 billion. Bankia is by far the biggest issue facing the country the other banks face less serious problems, he says.
The European Commission offered the outside prospect of a lifeline to Spain in an economic policy document published on May 30. It suggested that the European Unions 800 billion bailout fund, the European Stability Mechanism, could inject capital directly into banks rather than indirectly through the state, as happens now in the cases of Greece, Spain and Portugal. Spanish Prime Minister Mariano Rajoy has repeatedly said Spain itself does not need a bailout, but help for the banks could be a different matter. Securing Europe-wide agreement for such a plan, however, could be difficult. Steffen Seibert, spokesman for German Chancellor Angela Merkel, reiterated his countrys objection to such a use of bailout funds at a press conference on May 30.
The European Central Bank president Mario Draghi on May 31 threw his weight behind the Commissions proposals, but acknowledged the political difficulties. The issue is not so much if ESM money could be used to recapitalize banks, but whether this could be done directly without having to go through governments, he said at a press conference in Frankfurt. He also expressed his frustration with national banking supervisors, arguing for a more centralized authority that could decide on recapitalizations.