Spain is Too Big to Fail, but Not too Big to Save

By Tom
Updated on

Spain is Too Big to Fail, but Not too Big to Save

In regards to this prior article, titled Spanish Conundrum too big to save but too big to fail

I think the explanation is much simpler.

What do we know?

First and foremost inside the last fortnight the results from the revaluation of assets in Spanish banks have come in – at least in the 45% state owned BANKIA SA (PINK:BNKXF). The EU and the ECB has during 2011 implemented – through the national bank inspection – a uniform set of asset evaluation particularly among loans to agriculture and real estate developers – with collateral in farms and housing real estate.

The standards are based on what should have been a fair market price, but as neither farms nor blocks of flats are traded due to the unrealistically high prices needed for the banks to cover their loans, then some sort of surrogate must be used.

What inspectors did find out in the Bankia case was that even the most lenient interpretation of “true value” would lead to such vast impairments that any sign of equity would be an unsubstantiated rumor. In Bankia’s case – where inspectors couldn’t be kept away from the books due to the fact that this bank was a merger of failed banks – the additional impairment need was 20 bio. EUR.

To make matters worse: Bankia was the good daughter bank in a good bank/bad bank construction.

Moving away from hard facts into the territory of cynical speculation:

1) If Bankia, the fourth largest Spanish bank, was in such a state – what is then the condition of the remaining banks? Clearly no confidence could be attached to the work of the Spanish bank inspection. The additional losses could come from to sources: Either overestimation of the properties in the portfolio or from losses coming up due to consolidation of crossholdings.

2) Any investor with the slightest ambition of ever seeing his money again – let alone interest – would wet his pants at the mere thought of investing in new shares for any Spanish bank. The Greek default did nothing for the credibility, but even without that the Spanish banking system would be without access to the capital market.

3) Even without doubting the Spanish government’s integrity no investor would ever trust a Spanish government review of the banking system. At the very least the competence is deeply distrusted. The comments in connection with the handing out of the EU Commissions “report card” were withering: They had discovered the problems far too late to take effective action. I.e. the Spanish government hasn’t got the foggiest notion of the true state of the Spanish Banks. The ECB has twisted both arms on the Spaniards and clearly states that they just had to ask for help.

4) Thus left without information on the banks everybody (including investors) have to turn to alternative sources of information. Once such is the unemployment figures. Banks have a tendency to blame their mistakes on exogenous explanations (without getting into a cause and effect discussion). There is a correlation between unemployment and bank losses. The Spanish unemployment figures are even – at best – hopeless.

The conclusion is that the Spanish situation must be presumed to be so bad that a Japanese solution is not available. That is: Even if the Spanish state was able to raise the necessary funds at minimum interest rates and entomb the bad debt in nationalization, as Japan has more or less done taking over the banks debt and covered it with low interest sovereign bonds – then Spain would still be running a deficit that would need constant financing.

The Japanese “solution” is not even an option. Japan has had a positive balance of trade since 1981 with the exception of the last couple of years. Not exactly Spain’s position: Spain has been running a trade deficit consistently over the past 20 years – ok that has been countered by tourism; but never the less. – so even forgetting all about debt and service on said Spain is in no position to continue without massive restructuring of their economy.

Spain will have to tax and make Spaniards take the losses of the Spanish banks. The constant refrain about stimulating growth is fine; but there is no way that will solve the debt problem.

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