The bank debtor delinquency rate exceeded all historical records in June, curiously the same month when the Spanish government decided to ask for a European rescue to recapitalize the sector. Not since January 1962 when the Spanish CB started collecting these data has the percentage of unpaid credit in relation to total loan been at 9.42% which happened in June. This figure is equivalent to 164 bio. EUR according to the supervisors published data this Friday. An amount the entities have great difficulty in recovering.
This put continued pressure on the accountants whose mission it was to set the accounts in order and detect the possible distress hidden in the banks. The object of this works, which has now been finalised but whose results have not been published, was to reveal the wrongly classified loans.
The reason I trouble the readers with my pathetic translation is: The total predictability of the event!
- Banks don’t go bankrupt in the usual sense when they have lost all their money, simply because rather large losses can be hidden on the balance sheet – especially with low interest rates.
- When debtors don’t service their loans according to agreement the loans do not flow into the till. This means they have to be financed – which is normally done by depositors. In case of banks with a surplus of loans over deposits, the bank has to borrow from other banks.
This can be done for some time.
- What is to be avoided is to for the bank to call home loans, as the loans that can be called home are the healthy ones – the debtors that can actually pay and have alternative means of finance. A bank does not call bank a loan in real distress, at that will result in – If not an outright loss – then at least in a reservation (which is a cost – and goes from profit, and thus from equity) until it can be resolved how great the damage really is.
- As losses accumulate it gets increasingly hard to finance a surplus of loans – simply because banks with a deposit surplus deposit it in the central bank. I.e. the interbank market stops working. That is in itself not a disaster, as the bank can raise loans using sovereign bonds or even good loans as collateral. Another method is raising deposit rate to attract deposits from other banks.
- But at one time as the quick sand continues sucking the cash reserves in sovereign bonds have been sold off. It is around this time depositors starts worrying about their money. That happened in Spain in the first quarter where depositors fled to the tune of 100 bio. EUR out of Spain and into f.i. German sovereign bonds – despite their very low interest rates.
These days a bank run is not a heap of apprehensious old ladies lining up the streets with bank sweating tellers counting bills – it is orders to stock brokers. What happened in Spain was that some of the banks simply couldn’t transfer the money.
- In this case the government normally steps in and put the bank under administration. This means that they try and find out which loans can be called in – usually they are not many, and then the questions start coming as to why the rest haven’t been impaired – the explanation is normal trivial: The debtors can’t pay – and the collateral is nowhere near worth what the books say. The correct procedure should be to seize the collateral and sell it of – and book the difference as a loss.
But that won’t do! The seized asset might be sold off, but at prices far below any reasonable value.
- At this point the main difficulty is assessing “fair value”. There is generally no such thing as “market” value, as f.i. the property market has ceased to exist: Nobody buys – not in the neighbourhood of the asking price: A lot of bankers outrage directed at “scavenger” and “bloodsucker” investors.
This situation leads absolutely nowhere – as witnessed for the past 5 years.
Banks cannot finance the non-serviced loans, assets can’t be sold off. Governments steps in and replace the liquidity that literally has fled the country – well up to the point where the government can’t borrow enough: That was the problem in Spain.
- Then the government’s creditor’s step in with standards to assess the value of the collateral and impair the difference – generally to the level where shareholders “equity” is gone, at the bank can be recapitalised. There has been some instances where banks have raised new capital on the market, but it is generally not a very good idea, as serious investors know the game and would not dream of rescuing the shareholders – why should they? Equity is lost. Naive investors are an endangered species.
My old Latin textbook had Joghurta view Rome and say: “Ecce urbs venalis! Et mox peritura si emptorem invenerit!” Quoted from 40 years old memories: “Look a city for sale! And will soon perish if it finds a buyer!” Well, it was Joghurta that perished.
- The final curtain in the showdown is raised: Impairments to eliminate “equity” and public money to recapitalise the bank and annul old shares. The losses don’t stop there however: These banks will run at a loss for the foreseeable future – good to mediocre loans might be sold off – at a loss; but the rest of the balance will be of continually poorer quality. Who will pay those losses?
- The losses are eventually to be paid by the taxpayer – which governments desperately try to avoid. Basically because it means to have to redefine the term taxpayer. The economy is in depression and neither incomes nor VAT is able to supply the money needed to absorb the losses. Public spending to get the economy going has reached last sell by date a long time ago. The extra public spending will not generate enough income/consumption to recuperate the extra spending – all public and private investment that could generate a return has been made already. As if Europe hasn’t thought of that Mr. Obama and Romney!
There is only one way: Tax those who have something to tax – pension funds and tax evaders.
Why do you think the German Finance Minister Schäuble goes after tax evaders with a ruthless vengeance?