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Spain to Reveal Cajas’ Capital Hole in Contagion Fight

Bank of Spain Governor Miguel Angel Fernandez Ordonez
Miguel Angel Fernandez Ordonez, governor of the Bank of Spain. Photographer: Denis Doyle/Bloomberg

The Bank of Spain will tell lenders today how much capital they need to raise to meet new rules as the nation tries to convince investors that the cost of rescuing its banks won’t sink public finances.

The Bank of Spain will publish each lender’s capital shortfall and the overall amount, which the regulator has already estimated won’t exceed 20 billion euros ($28 billion), or 2 percent of Spanish gross domestic product. The government wants most of that to be raised privately even as central bank Governor Miguel Angel Fernandez Ordonez said Feb. 21 that some lenders will ask the state-rescue fund for help.

Spain, whose credit rating was cut by Moody’s Investors Service today, is trying to stem contagion as investors increase bets that Portugal will need a bailout and Greece lobbies to renegotiate its rescue deal. Prime Minister Jose Luis Rodriguez Zapatero’s government is seeking to show that lenders can weather a fourth year of economic slump and a jobless rate of 20 percent, as bond yields on peripheral euro-area nations surge.

“It’s like a mini-stress test in the type of data we’ll get and any greater transparency is to be welcomed,” said Claire Kane, an analyst at MF Global in London. “What will be clearer is how they come to the 20 billion-euro estimate and from there we can make our own assumptions.”

Moody’s Decision

Moody’s cut Spain’s credit rating one notch to Aa2 with a negative outlook today, saying the costs of shoring up the banking system will be greater than the government forecasts. The overall amount, including funds that may be raised privately, will be 40 billion euros to 50 billion euros, the company estimates. Fitch Ratings said today the system may have a capital shortfall of 38 billion euros in a “base-case stress scenario,” rising to 96.7 billion euros in a “more extreme stressed scenario.”

The gap between Spanish and German borrowing costs widened to 224 basis points today, even as the 10-year yield fell to 5.502 percent from 5.511 percent yesterday.

Yields on other high-debt euro-area countries also eased today after Portugal’s 10-year yield reached a record yesterday. Portugal and Greece’s yields fell to 7.480 percent and 12.776 percent, respectively.

Moody’s yesterday cut its ratings on six Greek banks, two days after it lowered Greece’s credit rating three levels on a higher risk of default. Standard & Poor’s said on March 1 that Portugal may need a bailout from the European Union and the International Monetary Fund.

Risk Premium

While Spain’s public-debt burden is lower than that of France or Germany, the gap between Spanish and German borrowing costs is 15 times as wide as it was in the first decade of monetary union. The government needs to rein in the third-largest budget deficit in the euro area and restore the economy to growth as private debt built up during a decade-long housing boom slows the recovery.

Spanish banks, mostly savings institutes called “cajas,” have recognized losses equivalent to 9 percent of GDP since 2008, the Bank of Spain said on Feb. 21. Cajas’ exposure to the real-estate and building industry amounts to 217 billion euros. About 100 billion euros of that is already classified as “potentially problematic,” of which 38 percent is covered with provisions, the regulator said.

“At the moment, solutions are being found to many of the problems in the financial system,” said Jose Nieto, chief executive officer of Banca March, a bank controlled by the billionaire March family that closed 2010 with a core capital ratio above 22 percent. “All this is good and if it occurs sooner rather than later, all the better.”

Rescue Fund

As part of efforts to rein in its borrowing costs, the government approved the new capital requirements on Feb. 18 and said lenders that fail to meet them risk partial nationalization via the purchase of ordinary shares by the FROB bank-rescue fund. That facility, created with 9 billion euros and the capacity to take on as much as 90 billion euros of debt, has already committed about 11 billion euros through the purchase of preferred shares.

“The issue is, how much are the assets worth?” Javier Diaz-Gimenez, a professor at IESE business school in Madrid, said in a telephone interview. “Do you value them at market value, or purchase value or something in between, which is fair value: and what is fair value?”

Capital Targets

The new rules, which say an independent expert will value the lenders that the FROB buys into, were approved by decree last month and ratified by parliament today. Listed banks must have core capital of 8 percent, while lenders that aren’t at least 20 percent-owned by private shareholders and depend on wholesale financing are required to reach 10 percent. They have until September to meet the new requirements and can seek an extension until the first quarter of 2012 if they commit to listing shares.

Spain’s two biggest savings banks, La Caixa and a merged group led by Caja Madrid, have already announced plans to become listed lenders. The Caja Madrid group, which received FROB funds, has created a bank and plans an initial public offering this year. La Caixa will transfer its banking operations into its listed investment unit, Criteria CaixaCorp SA.

Zapatero, a Socialist who has implemented the deepest austerity measures in three decades since after last year’s Greek crisis, said the financial system’s restructuring is on “the right track” as the number of savings banks has been reduced to 17 from 45.

“It is indispensible and should contribute decisively to the economic recovery and the recovery of market confidence,” he told parliament yesterday.

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