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The Market Calls BS on Spain’s Efforts to Cover Its Toxic Banking Debt

Interest-Rates / Credit Crisis 2012 May 01, 2012 - 12:37 PM GMT

By: Graham_Summers

Interest-Rates

Best Financial Markets Analysis ArticleIn a previous article I began delving into the toxic sewer that is the Spanish banking system. At the root of the problem is the previously unregulated Spanish cajas or regional/ local banks which own as much as 56% of all Spanish mortgages.

To give you an idea of how bad things are with the cajas, consider that in February 2011 the Spanish Government implemented legislation demanding all Spanish banks have equity equal to 8% of their “risk-weighted assets.” Those banks that failed to meet this requirement had to either merge with larger banks or face partial nationalization.


The deadline for meeting this capital request was September 2011. Between February 2011 and September 2011, the number of cajas has in Spain has dropped from 45 to 17.

Put another way, over 60% of cajas could not meet the capital requirements of having equity equal to just 8% of their risk-weighted assets. As a result, 28 toxic caja balance sheets have been merged with other (likely equally troubled) banks or have been shifted onto the public’s balance sheet via partial nationalization.

The markets are well aware that this policy has only spread the toxic garbage, not fixed it. Case in point, take a look at the chart for Banco Sabadell which was merged with toxic Caja de Ahorros del Mediterráneo or CAM for short.

The merger increased Banco Sabadell’s size by 75%… and the market saw this as a good thing for a total of two weeks: shares are now down 30% from their merger levels.

Banco Popular, which acquired failing caja Banco Pastor, has experienced a similar fate, falling to a new low soon after the merger:

My point with all of this is that merging one garbage bank with another larger slightly less garbage bank doesn’t solve anything. The market knows this, which is why we see these banks continuing to collapse despite being merged.

Having addressed all of this, I firmly believe that no one, not even the Spanish Government has a clue how much toxic garbage debt exists in the Spanish banking system.

Moreover, it’s not as though the Spanish Government is heavily incentivized to come clean about the true nature of the Spanish banking system even if it did know the facts.

Case in point, the Government just admitted that Spanish banks will need another €29 billion in loan loss provisions yesterday, before revealing that  “problem loans” for the Spanish banking system are now at an 18-year high of 8.15% (€140 billion of the total €1.7 trillion in loans within the Spanish Banking System).

Put another way, by the Spanish Government’s own admission (read extremely conservative estimate) nearly one out of every €10 leant out by Spanish banks is probably not going to be paid back.

And things are only going to get worse. Spanish citizens (at least those that have money) have been pulling their money out of Spain en masse: €65 billion left the Spanish banking system in March 2011 alone.

This flight of capital will result in higher leverage levels for Spanish banks (already leveraged at 20 to 1) and smaller capital buffers with which to address future losses.

Put another way, capital is leaving Spain at the very time when Spanish banks need it the most. Indeed, things have gotten so bad that the Spanish Government has limited cash transactions over €2,500.

Simply put, Spain’s banking system is an absolute sewer of toxic debts that no one, likely not even the Spanish Government or Spanish Central Bank, truly has a grip on.

The few facts that we do know are:

  • Total Spanish banking loans are equal to 170% of Spanish GDP.
  • Troubled loans at Spanish Banks just hit an 18-year high.
  • Spanish Banks are drawing a record €316.3 billion from the ECB (up from €169.2 billion in February).
  • The share prices of Spanish banks that were merged with cajas have broken to new lows.

None of this is good news at all. Especially when you also consider that…

Spanish banks need to roll over 20% of their debt this year.

That’s correct, one fifth of all Spanish bank bonds need to be paid off or renegotiated in 2012. And this is happening at a time in which Spanish interest rates are rising. Indeed, the Spanish ten year is approaching the dreaded 7%: the level at which Greece and other PIIGS sought bailouts.

The only problem is: Spain is far too big to be bailed out.

Those investors looking for actionable investment ideas could also consider our Private Wealth Advisory newsletter: a bi-weekly detailed investment advisory service that distills the most important geopolitical, economic, and financial developments in the markets into concise investment strategies for individual investors.

To learn more about Private Wealth Advisory and how it can help you navigate the markets successfully…

Click Here Now!!!

Graham Summers

Chief Market Strategist

Good Investing!

http://gainspainscapital.com

PS. If you’re getting worried about the future of the stock market and have yet to take steps to prepare for the Second Round of the Financial Crisis… I highly suggest you download my FREE Special Report specifying exactly how to prepare for what’s to come.

I call it The Financial Crisis “Round Two” Survival Kit. And its 17 pages contain a wealth of information about portfolio protection, which investments to own and how to take out Catastrophe Insurance on the stock market (this “insurance” paid out triple digit gains in the Autumn of 2008).

Again, this is all 100% FREE. To pick up your copy today, got to http://www.gainspainscapital.com and click on FREE REPORTS.

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

© 2012 Copyright Graham Summers - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Graham Summers Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

gAnton
01 May 12, 17:42
Funnier Than The Three Stooges

I have come up with a list of eight names, each one which will be far funnier than that of any of the three stooges (I am sure that many investors world wide will die laughing). The are listed in probable order of funniness:

China, USA, Spain, Italy, France, Greece, Portugal.

That's All, Folks!


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