In Focus: Spanish Banking Plan Seeks to Tackle Debt Load
Spain’s government, struggling to manage not only the country’s debt but to minimize the extent to which the country’s banks end up requiring bailouts, announced another set of industry reforms aimed at helping these institutions address the fallout from the housing market meltdown that has left them stuck with as much as €175 billion in problem real estate lending.
As Spain’s economy has soured and its unemployment has soared, so have those problem loans, as seen in the charts below. And yet the banks have been unable or unwilling to set aside provisions to cover those estimated losses, a move they fear would put large holes in their balance sheets that they don’t have the capital to fix. Now the Spanish government has taken the decision out of their hands, insisting that they set aside an additional €30 billion to provide against losses in still-sound loans on their books, and raise any new capital on their own – although they will have the option of asking the government for help. They also have been told to set aside problem loans in holding companies, special purpose vehicles in which they can be held until they can be disposed of – somehow
As Reuters reported earlier today, Spanish Prime Minister Mariano Rajoy is under pressure to clean up the mess that the country’s troubled banking sector represents in an expeditious manner. Earlier this week, the government effectively took over Bankia SA (BKIA.MC), the country’s fourth-largest financial institution, ending up with a 45% stake in it in exchange for an emergency capital infusion.
The catalyst for the banking industry’s woes is its aggressive pre-crisis lending to the real estate industry, whether in the form of mortgages to buyers paying premium prices or to developers building “on spec”. Housing prices have been falling steadily since 2008, as shown in the chart below, and the consensus is that they have farther to go. That’s the problem that the banks and the government face as they attempt to devise a definitive solution to the country’s banking crisis.
The smaller Spanish banks – the ones most focused on the domestic markets – are likely to create the biggest problems for the Spanish government. Still, even the biggest global players top the list of European banks whose debt holders have to pay up heavily for the privilege of insuring their holdings via credit default swaps. Prices for CDS protection on BBVA (BBVA.MC) may be below their three-year highs, but they are still triple what debtholders would have to pay for protection for Sweden’s Handelsbanken (SHBA.ST).
Problems executing the reform package, or further delays, could spook government bond markets, too. Yields on Spain’s debt hover at around 6%, which is driving up the country’s own borrowing costs. Any signs that the government will have to step in again as it did in the case of Bankia and as happened in Ireland could show up in yields that edge up higher still, economists have warned.
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