Spanish Bank Bailout Unlikely to Succeed
It has been abundantly clear that Spain would need a bailout for its sick banking system, and rumours have emerged that this could happen as early as this weekend. I doubt that the details of a plan will be agreed so soon as an independent stress test of the Spanish banking system is still being carried out by Oliver Wyman/Berger (results due June 18th). Much more likely, EZ leaders will once again plan to make a plan to make a plan to bail out the Spanish banking system. What are EZ policymakers trying to achieve with a Spanish bail bailout, and can they succeed?
With rumours about an imminent Spanish bank bailout at fever pitch, many have asked “why now?” EZ leaders will try to achieve three things with a bailout for Spanish banks.
First, there is a direct connection between Greece and Spain in terms of their banking sectors. We have witnessed a “bank jog” in Greece for months, which intensified in May. There were some reports of a bank run in Spain as well, though this is only true among foreign depositors in Spanish banks. A bailout for Spanish banks could be aimed at preventing a bank run from ripping across the periphery. EFSF/ESM money for Spanish banks is unlikely to succeed in avoiding a bank run, however. Depositors in the EZ periphery are withdrawing their money from banks over concerns about their countries leaving the EZ and their savings being redenominated and devalued away. A bailout for Spanish banks is very unlikely to allay these concerns.
Second, EZ leaders hope a bank bailout will reinstill confidence in the Spanish banking sector. Uncertainty about the size of the black hole in the Spanish banking system has been corrosive for investor confidence. Unfortunately, this too seems unlikely to succeed. There are currently two stress tests being conducted on Spanish banks, one by the IMF (published June 10th) and one by Oliver Wyman/Berger (published June 18th). The IMF stress tests have been completed and reportedly envision a €40bn bank recapitalization. This would make the Spanish bank bailouts cheaper than those for the Irish banking system (already upwards of €60bn), a veritable bargain! It is possible that EZ policymakers will wait to devise a figure for the bank bailout until Oliver Wyman/Berger publish the independent bank stress tests later this month. If the underlying assumptions in the independent stress tests involve years of recession and a further 20% fall in the property market as the base case, then they may be credible. There is a chance that, as with the independent stress tests done on Irish banks by Blackrock, the underlying assumptions for the stressed case actually become reality and further bank recapitalizations seem necessary.
Third, a bailout for Spanish banks would be aimed at avoiding one for the sovereign. External capital flight from Spain over the past few months has made Spain’s external debt position even more unsustainable. In the absence of capital inflows—unlikely as investors are not exactly flocking to Spain and the external economic environment means Spain’s export markets are not booming—Spain will need official financing to plug the gap. Furthermore, a bank bailout for Spain will most likely be funneled through the state (or through FROB) rather than being injected directly into banks. This means that the cost of bank bailouts will be foisted onto the sovereign’s balance sheet, making Spain’s public debt position look more unsustainable.
Even if a bailout for Spanish banks does not come this weekend, it will come soon. Unfortunately, it is very unlikely to succeed in drawing a line under concerns about Spain’s solvency. In the absence of economic growth, a bailout for Spain’s banks will be followed by a bailout for the sovereign as well.
For more in-depth analysis on Spain, its debt sustainability and its path forward, see Roubini Global Economics’ Spain Scenarios: Bring on the Bailout.
This post originally appeared at Economist Meg and is posted with permission.
7 Responses to “Spanish Bank Bailout Unlikely to Succeed”
Explain the construct and scope of sovereign debt if you would not mind. What would the impact be for the population of a bankrupt sovereign with excessively large debt?
Spanish banking sector has deleveraged 88bn€ about(8% mortgage portfolio) in about 18 months at a cost of 43bn npl increase (72% correlation between deleverage and non performing loans). The banks mortgage assets wil shrink for about another 100bn and the speed will increase as the mortgages are older (2006 average mortgage 26 years now interest weight far less in payments). With 50bn Spain will have plenty to deleverage and clean most of the balance sheets . Still 20% reduction capacity in labour and offices needed ( it has accelerated last year when a 6% reduction happened, twice the volume of 2010). BMN Wich is insolvent and Liberbank should be absorved.
We also have to consider that Spain has 2 huge solvent banks who are able to absorb smaller institutions. Non of the rescued european countries had multinational solvent institutions.
Trusting an auditor report that has been made in less than a month englobing the whole spanish sector its is just a bad joke. So waiting the results of that lacks any sense and will put preassure in Spain as the Greek elections will have already happened.
The crisis is over
But let us look at the real background behind all this.
Basicly the American and German companies are great at making equipment which they sell to the Chinese which they use to employ excess labor and produce consumer goods to put most Americans and Europeans at risk in their jobs.
This produces profits which the Americans, Germans, and Chinese use to do more of the same.
The workers may retrain very slowly to compete but the American, German, and Chinese capital cheap labor machine is going to get better even faster.
The Chinese are not going to quickly change their model so much faster the worker is not going to be able to buy the Chinese goods which means the Chinese, American, German cheap labor Capital machine goes into recession with the workers already in recession.
I see no leadership to address this which implies Spain will not be able to compete and will not pay back its loans.
Market comments from London and NY tend to assume that because bond yields have been rising, Spain will be forced out of the Euro. In fact this is very uncertain. The proposed rescue may indeed stabilise the Spanish banking system if it can restore confidence. The real problem remains potentially Greece. IF Greece leaves the euro – far from uncertain given the fluid state of Greek politics and extreme French pressure on Germany to make concessions to Greece- then Greek depositors will take losses which MAY lead to a further "jog" on Spain and more critically Italian banks. However, whilst journalists like to see events happening tomorrow, this will happen on a far more drawn out timescale. Further government action to support Italian and Spanish banks would be likely. The really critical determinant is however property which will be determined at least in part by confidence. Too few commentators focus on the property market despite the obvious evidence from USA and Ireland as to its importance. If residential and commercial property markets in Italy and Spain only decline gradually then the outlook is difficult but not impossible. Many economic commentators in London and New York tend to ignore the major reductions in budget deficit and labour reforms already in the pipeline. If,however, the property market collapses e.g returns to 1990 level in real terms then the banks' balance sheets will be destroyed. Germany may be keen to help but the amounts here could be overwhelming. The future of the euro rests on property prices in Padua and Salamanca in three years' time.
The bailout package is "peanuts" compared to what Spain really needs.
Merkel is running out of time. Her (hard core) austerity plan is destined to fail. Europe needs to change course and get out of this hard austerity that causes major recession. Obviously they didnt learn anything from their "guinea pig" (Greece).
Germany needs a new leadership and a new pan-european plan of action. Otherwise the euro -as we know it- is destined to fail. Fast.
I disagree with the writer ( a rare occurrence). Spain is a bigger Ireland (but with some good banks) and not Greece.