UBS AG Chief Investment Officer Alexander Friedman said the situation for Spanish banks is “more dire” than the government has said and may worsen before the European Central Bank lends its support.
“The ECB would expect first an admission by the government in Spain, and by obviously the banking sector, that it needs to recapitalize probably in excess of 100 billion euros ($125.4 billion),” Friedman said in an interview on Bloomberg Television’s “The Pulse” with Maryam Nemazee. The International Monetary Fund would also need to “step in with a series of conditions that would give the ECB comfort enough to play its part. We’re not there yet.”
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, Economy Minister Luis de Guindos said this month, leaving its ability to bail out lenders dependent on Spain’s access to markets.
De Guindos said May 11 that a law tightening provisioning rules would require public funds of less than 15 billion euros. BFA-Bankia said on May 25 it was taking 8.5 billion euros of provisions on top of those demanded by the government as it sought a 19 billion-euro state bailout.
Spain today backtracked on a plan to use debt issued by the government or its bank-rescue fund instead of cash to prop up the Bankia group. A spokesman for the economy ministry said the idea had become a “marginal” option.
Providing banks with Spanish debt so they can get cash from the ECB “in a sense is another kind of LTRO,” Friedman said, referring to the ECB’s longer-term refinancing operation, which provided three-year loans in December and February. It’s not clear whether the ECB would approve of such a plan.
Friedman said in his monthly letter to UBS client advisers last week that there is a “material risk” of a run on banks in peripheral countries even before Greek elections in June.
The euro region needs economic growth and structural reform to resolve the crisis, Friedman said today. Pledging euro-wide deposit insurance may not be enough, while there’s a risk of countries exiting the currency, he said.
Deposit insurance may “have to come from each of the national banks, and in turn the ECB could provide some kind of insurance against the collateral for each of those national banks,” he said. “But if you’re a citizen of a country where you think there is a possibility that country exits the euro zone, then that guarantee won’t mean anything. And that’s the real risk around the structural issue of does the euro zone hold together or not.”