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Spanish banks: The mess in La Mancha

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MensajePublicado: Lun Abr 06, 2009 8:05 am    Asunto: Spanish banks: The mess in La Mancha Responder citando

Spanish banks: The mess in La Mancha

Part of Spain’s bad-debt problem is hidden within its savings banks

PESSIMISTS about Spain’s economy are as oversupplied as flats in the concrete ghost towns on the edge of Madrid. Unemployment could hit 20% next year and common sense suggests a bad-debt problem will eventually hit the banking system. House prices were as barmy as in America and Britain, rising by almost two and half times from 2000 to the peak. And Spain’s cement mixers were on fire: three-quarters of a million homes were built in 2006, half the number in America, whose population is seven times larger.

While debt investors have been giving Spanish government bonds an extra sniff and property firms have tottered, the banks have appeared to be Teflon-coated. The two biggest, Santander and BBVA, have beaten international competitors, partly thanks, if Spain’s supervisors are to be believed, to good regulation. The bail-out on March 29th of a small savings bank, Caja Castilla La Mancha, could change that perception. The government’s liquidity package of up to €9 billion ($12 billion), which will probably be bolstered with equity, is a reminder that many of Spain’s bad debts fester outside the listed banks.

Spain’s cajas are mutually owned and controlled by a mix of depositors, employees and local politicians, and they distribute a big chunk of their profits to local causes. Since the 1960s they have increased their market share of loans from about 10% to 50% by opening branches in smaller cities and by extending credit to people and businesses ignored by the market leaders. When the big two banks put the brakes on in 2006-07, the cajas continued lending more keenly, tapping wholesale debt markets to fund themselves. That alone makes them higher risk. But the savings banks also supplied about half of the €318 billion borrowed by Spain’s property developers. These loans now represent about a fifth of the cajas’ assets, according to Santiago López Díaz, an analyst at Credit Suisse. They are deteriorating fast.

The exact state of Castilla La Mancha is unclear and a restatement of its accounts is likely. But taken together, by January 4.5% of all the cajas’ loans had gone sour, compared with 3.9% for the banking system. The pace of deterioration (see chart) threatens to overwhelm the scope of reserves, capital and ongoing profits to absorb losses. Mr López Díaz reckons that 9% of the cajas’ total loans could become non-performing, and within that a fifth of the loans made to property developers. Assuming this, the cajas could need €60 billion of new equity, on top of the €64 billion they already have. Sales of the stakes the savings banks hold in Spanish companies and takeovers of laggards by the healthier ones could fund some of that. But the government would probably be on the hook for most of it.

The Bank of Spain contends that the problem is manageable, but a large bail-out looks inevitable and will be complicated by the politicised governance of the cajas. The episode is a reminder that banks’ woes have moved on from mark-to-market losses on esoteric trading assets to big hits on traditional loan books. Spain may have just undertaken the first bail-out of the second act of the banking crisis.
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