Spain’s two-week effort to overhaul its lenders and estimate for what it will cost taxpayers may already look out of date.
Economy Minister Luis de Guindos said May 11 that a law tightening provisioning rules, his second in three months, would require public funds of less than 15 billion euros ($19 billion). BFA-Bankia, the bank nationalized the same week, said on May 25 it was taking 8.5 billion euros of provisions on top of those demanded by the two decrees, as it sought a 19 billion-euro state bailout. Bankia shares fell as much as 29 percent in Madrid trading today.
“They’ve done two reforms already and there will probably be more; I don’t know how many more,” Javier Diaz-Gimenez, a professor at the IESE business school in Madrid, said in a telephone interview. “They have zero credibility.”
Spain is seeking to clean up banks and help its cash-strapped regions just as its own access to capital markets has narrowed and depends increasingly on domestic lenders. The nation’s bank-rescue fund has 5 billion euros in cash, de Guindos said this month, leaving its ability to bail out lenders dependent on Spain’s access to markets.
The country plans to inject public debt instead of cash directly into the Bankia Group to pay for the bank’s recapitalization and avoid having to go to market with the instruments, El Pais reported yesterday, without citing anyone.
Based on what happened at Bankia, the recapitalization needs of Spain’s banks could amount to as much as 60 billion euros, Daragh Quinn, an analyst at Nomura International said in a report today. “Given the current economic and political uncertainties facing the euro zone, this could see additional pressure on Spain to consider using external funds for the bank recapitalization,” he wrote.
The yield on Spanish 10-year debt jumped to 6.42 percent from 6.29 percent on May 25. The spread between Spanish 10-year debt and German bunds rose to 507 basis points, a record, from 491.2 basis points.
Until now, to pay for bank bailouts, the state would sell debt in the market through its bank rescue fund, known as the FROB, and use the cash to aid banks. A jump in yields has made debt sales more difficult and expensive, El Pais said.
The nationalization of BFA-Bankia on May 9 and the new provisioning rules two days later were Spain’s fourth attempt in three years to restore confidence in lenders after the property crash left them saddled with 184 billion euros of what the Bank of Spain calls problematic assets linked to real estate. The present government came to power on Dec. 21.
In the first round, led by the former Socialist government, the FROB spent 10 billion euros buying preference shares in lenders it encouraged to merge, including Bankia, which received 4.5 billion euros.
Last year, authorities increased capital requirements and coaxed unlisted lenders onto the stock market. Bankia responded by selling shares to the public in July, since then their value has fallen 58 percent.
In February, de Guindos, a former Lehman Brothers Holdings Inc. executive, ordered banks to set aside 53.8 billion euros of provisions and capital. His second decree on May 11 called for another 30 billion euros on performing real estate lending.
De Guindos said the cost to taxpayers of the May 11 decree would be less than 15 billion euros, even as economy officials who later briefed reporters on condition of anonymity said that figure included the cost of rescuing Bankia. A spokesman for the Economy Ministry said the figure referred solely to the impact of the decree, and said the government was sticking to its forecasts.
“They are trying to do the minimum all the time and kick the can down the road,” Juan Rubio-Ramirez, an economics professor at Duke University and visiting scholar at the Federal Reserve Bank of Atlanta, said by phone yesterday.
Efforts so far have focused on assets linked to the real estate industry, while the government and executives including Banco Santander SA Chief Executive Alfredo Saenz have said that household mortgages don’t pose a risk. Spain’s unemployment rate exceeds 24 percent and the economy is suffering its second recession since 2009.
“Mortgages get paid in good times and in bad,” Saenz said on April 27. “Anyone raising this problem as one of the issues for the Spanish financial system is saying something stupid.”
Bankia may have cast doubt on that position by setting aside another 2.2 billion euros in provisions for individual loans, most of which are residential mortgages. Bankia based the new provisions on an assumption that mortgage defaults would rise to 8 percent to 10 percent, Director General Jose Sevilla said on May 26, compared with the current sector-wide rate of less than 3 percent. It also increased provisions for lending to companies outside the real-estate industry by an additional 3.3 billion euros.
As part of de Guindos’s latest overhaul, Spain has commissioned Oliver Wyman Ltd. and Roland Berger AG to carry out a stress test on all Spanish banks’ entire loan book. That will be followed by a detailed audit carried out by three companies.
“There should be a higher level of non-real estate provisions, whether that’s done through legislation or informally on the back of this external review,” Nomura’s Quinn said in a telephone interview. “There will be pressure for every domestic Spanish bank, except Santander and BBVA, to raise capital if you assume the kind of provisioning we’ve seen in Bankia.”
Risks to Spain’s financial industry and the state are increasingly intertwined as the government’s access to borrowing narrows, and Prime Minister Mariano Rajoy says the nation risks being locked out of markets. Foreign investors cut their holdings of Spanish debt to 37 percent Spain’s total outstanding debt in circulation in April from 50 percent at the end of last year.
Domestic lenders, bolstered by emergency funding from the European Central Bank, have picked up the slack, increasing their share to 29 percent from 17 percent over the same period. At a bond auction on May 17, foreigners took 20 percent to 30 percent of the issue, a government official, who declined to be named, told reporters at a briefing that day.
Spain has repeatedly ruled out seeking European Union help either to shore up the banks or its sovereign debt. De Guindos told parliament on May 23 that Bankia is a “specific case,” without any implications for the rest of the industry, a view Bankia Chairman Jose Ignacio Goirigolzarri endorsed on May 26.