Spain to Nationalize Banks in Response to Liquidity Issues?

By Tom
Updated on

Charles Penty of Bloomberg reported this evening about Spain’s surging bad loans, and the problems that they are causing to the banking system.

The article noted the below headline in bold:

8 % of the bank loans are non-performing in February 2012.

First a chart of the Spanish housing bubble followed by our comments:


Spain to Nationalize Banks in Response to Liquidity Issues?

That is perhaps an understatement with mortgage rates between 2.3% and 3% – and it is generally variable with annual fixing. So any increase in interest rate will automatically raise the share of non-performing loans: If you can’t pay 2½% interest – you can’t pay – period. True 24% unemployment doesn’t help either.

“One of our concerns in Spain is to what extent contingent liabilities could pass to the central government,” said Andrew Bosomworth, Pacific Investment Management Co.’s

The question is whether nationalization of the banks is an option!

With 140 odd bio. Euros listed as “doubtful” there is no equity in Spanish banks. The Spanish government has advanced the banks plenty, so there is no way but a recapitalization of the Spanish Banks (note the plural). The open market does not seem an option for raising capital, considering the rotten balances – so that leaves the state.
But considering an interest rate on sovereign bonds of 6% – the ECB relief was short lived. Can the Spanish state raise the money?

What do the Germans say?

A quick browse in the European papers gives the clear answer: No.

Frankfurter Allgemeine Zeitung:

Liquidity is not the problem – it is solidity.

German CB CEO Jens Weidmann to Reuters: “We shouldn’t always predict the end of the world when the long term interest rate of a country raises about 6% momentarily.” And added: “It should be an encouragement for continuation of the policy to win back confidence though reforms. It cannot be the concern of the ECB to help Spain with printing more money – for instance though further buys of sovereign bonds or through new long term credits for the Banks.

The German Ministry of Finance:

It is not seen that Spain need an assistance program nor wish to use such a program.

EU commissioner Olli Rehn points out, that there are no legal way for the EFSF (part of ECB) to extend credit to banks except through national governments. Even this is only imaginable IF a bank can document that it cannot finance over the capital market AND the national government not on its own can stem the plight of a distressed bank.

Spain has a massive private bad debt and an exorbitant public ditto.

My postdiluvian index including Spain reveals:

  • The temporary pause in the price drop caused by crushing the banks has resumed where it left off.
  • Figures earlier than Q1 2007 were not at hand. Trust the Spaniards to do nothing until it is to late.

The message from the EU is clear: Spain is on its own. Spain MUST perform on its promises.
But the real audience is the banks – not only in Spain: There is no such thing as “to big to fail”. What the EU might do is to prevent a country from going under with the banks, but it will be an expensive and meager lunch.

The EU will not listen to bankers “concerns”.

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