Will Spain suffer an Irish bust?
Published: 9th May 2012 21:22:33
The big question for Spain and for the eurozone is whether it is a giant version of the Republic of Ireland.
To put this another way, will the cost of rehabilitating its banking system be greater than Spanish taxpayers can afford?
And if the price is unbearably large, would it make sense for Spain to request a bailout from the International Monetary Fund or the eurozone's European Financial Stability Facility (EFSF) or both?
According to a senior banker, we will get some of the answers on Friday, when the Spanish government is expected to decide what level of losses Spanish banks should be obliged to recognise on their reckless property and construction loans, on top of 50bn euros of provisions they have already been forced to make to cover potential losses.
This banker expects just a handful of savings banks - of which the biggest and most important is Bankia - to be instructed to set aside 25bn to 30bn euros to cover the additional costs of loans going bad.
This is expected to lead to the partial nationalisation of Bankia, which is Spain's biggest retail bank with around 15% of domestic banking assets.
The partial nationalisation will be a controversial operation, because it will lead to huge losses for many thousands of Spanish investors, who bought shares in Bankia and provided it with loan capital when it was listed on the stock market last year.
There are fears that if the value of Bankia's shares were wiped out in the rescue, this could prompt such anxiety among savers that they could withdraw their savings from Bankia, further weakening the bank.
So why are Spain's savings banks in such a mess?
Well, the central bank, the Bank of Spain, has estimated - in its last Financial Stability Report - that Spanish banks are sitting on what it calls "troubled" property and construction loans of 184bn euros, equivalent to more than 17% of Spanish GDP.
Those loans are the poisonous legacy of a housing and construction boom that saw 5 million new homes built between 1997 and 2007, twice the increase in new Spanish households. Whole ghost towns were built.
Such is the dire quality of these loans that the banks are assuming they will ultimately get back only half or less of what they lent.
So it is possible that the banks are getting close to having properly recognised the scale of pain they face on this category of their lending.
However, they may not yet have made proper provision for likely losses on other categories of loan, notably residential mortgages, loans to small companies, and loans to highly indebted big companies.
That is why bankers, regulators and analysts increasingly fear that the capital banks will need as a protection against these losses may exceed what can be raised from conventional investors and Spanish taxpayers.
That said, there are substantial costs and risks for Spain in borrowing the money from the eurozone's bailout fund, the EFSF, quite apart from the humiliation of being seen to have its economic policy dictated by Germany.
One potential pitfall of taking a rescue loan from the eurozone is that it would probably have the effect of subordinating Spain's existing sovereign debt.
To put it another way, the implicit value of the Spanish government's existing debts would be reduced. And that would then force even greater losses, perhaps calamitous losses, on the banks, which have lent well over 260bn euros to the Spanish public sector.
So some bankers argue that Spain might be better off asking the IMF for emergency funds that could go directly to the banks, rather than counting as a loan to the government.
How long can the Spanish government prevaricate and fail to make sure the banks have all the capital they need?
Well probably not that long, because Spanish banks are reining in their lending, and thus damaging the Spanish economy, in response to their capital deficiency.
Based on the recently published results of Spain's seven publicly listed banks, the investment bank Morgan Stanley calculates that lending in Spain is contracting at a damaging annual rate of around 8%.
A credit crunch is exacerbating Spain's recession.
If all this sounds familiar, that is because it is - to a great extent - a re-run of the collapse of Ireland's banks.
Just like Spain, Ireland for months insisted it had the resources to sort out its banks on its own. But in the autumn of 2010, it capitulated in the face of horrific market reality, and went cap in hand to the eurozone and IMF.
The other lesson of Ireland, many would say, is that the longer a government fails to face up to the true weakness of its banks, the bigger the eventual costs of the remedy.
One part of the Spanish government's plan to strengthen the banks has happened tonight.
Spain's banking bailout fund, the FROB, will convert a 4.47bn-euro loan to Bankia into shares in the troubled bank.
This amounts to a partial nationalisation of the bank, because state fund will emerge with a stake in the bank of 45%.
Whether that will be the last injection of taxpayers' money into Bankia, we shall have to wait and see.
The Bank of Spain, the Spanish central bank, said tonight:
"The new management of Bankia will have to submit, as soon as possible, a fortified clean-up plan that will place it in a position to address its future with every guarantee of success."
The central bank added: "Bankia is a solvent institution that continues to operate on an absolutely normal footing. Its customers and depositors have no cause for concern."
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Harvard CitationBBC News, 2012. Will Spain suffer an Irish bust? [Online] (Updated 9th May 2012)
Available at: http://www.ukwirednews.com/news/1427681/Will-Spain-suffer-an-Irish-bust [Accessed 7th Mar 2014]
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With the doors to its brand new £1million training centre officially open, one of the UK's leading apprentice training providers, Bristol based S&B Automotive Academy, is showcasing its world-class facilities by launching a series of foreign student exchanges for the first time in its 41-year history. To get a flavour of what life is like as an apprentice in the UK, the Academy hosted 16 apprentice engineers and bus drivers from the G9 Automotive College in Hamburg, Germany, as part of a Europe-wide vocational training initiative called the ‘Leonardo Programme’ with support from the European Social Fund. In a reciprocal arrangement, S&B will be sending nine apprentices to Germany during February 2012 so that they can get an appreciation of life in the automotive industry on the Continent. A further three German exchange groups are being planned for next year. Designed to assist the development of vocational skills and training across Europe, including work placements for trainees, the Leonardo Programme has a budget of €1.75bn, which is helping to encourage UK organisations to work with their counterparts abroad. In what is expected to be another challenging year for employers in the UK automotive sector, S&B’s Chief Executive, Jon Winter, claims that the exchange initiative will bring many benefits to the Academy and its apprentices: “In a world of global automotive brands, it’s important for our learners to understand the international context of the industry they have chosen to make their career. This new exchange programme will enable apprentices and Academy staff alike to achieve a better understanding of the challenges and opportunities within the automotive arena in Europe. With the Academy’s influence also extending to the USA and Asia, there’s every possibility that this initiative could move further afield in the future.” Continued Winter: “The need for skilled technicians across the world is on the increase and we actively encourage our apprentices to look at broader horizons during their training. Many of them have already learned the phrase ‘Vorsprung durch Gelehrtheit’, quite simply, ‘Advancement through learning.” In the 2010/11 academic year, S&B doubled the number of successful Apprenticeships over the previous year with some 350 apprentices graduating from the Academy. At the same time, achievement levels reached an all-time high with an overall success rate of 85%. For those learners on the Advanced Apprenticeship three-year programme, success rates were even higher, at over 98%. PHOTO CAPTION: As part of their exchange visit, S&B Automotive Academy arranged for the German apprentices to visit Hampshire bus operator, Bluestar, at its Barton Park depot. The students are pictured with S&B’s Andy West (3rd right) and Steve Prewett, Bluestar’s Area Engineering Manager (2nd right). Ends http://www.sandbaa.com