Friday, May 11, 2012

Spain repeats Irish errors in handling real estate driven bank solvency crisis

Showing that it learned nothing from the Irish errors in handling a real estate driven bank solvency crisis, Spain rolls out banker friendly policies that will exacerbate its economic problems.

According to a Telegraph article, Madrid focused on maintaining the facade that its banks are solvent.

Why?  Everyone knows that its banks are insolvent as loans to not just property developers, but consumers (mortgages) and businesses have gone bad?
Madrid ordered its key financial institutions to raise provisions against toxic property loans from 7pc to 30pc, as part of its fourth attempt to shore up the stricken sector since the Spanish property bubble burst. 
Banks, many of which are still struggling to implement the last €54bn (£43.4bn) recapitalisation programme ordered in December, have also been told to separate their real-estate loans from the rest of their assets in a further effort to ring-fence the problem area.
The Spanish banking system has 1 trillion euros in real estate exposure.  Is all of this suppose to go into the ring-fenced area?

Who is going to absorb the losses on these loans?  The banks?  The Spanish taxpayer? 
The move will provide an extra €30bn cash cushion to ward against tumbling property prices. The measures will take total provisions against real estate assets to €137bn (£110bn) or 45pc of the banks' portfolios. The government is expected to guarantee the loans above this level.
This only addresses the real estate loans made to property developers and not to mortgages.  It leaves no reserves for bad mortgage, consumer and business loans.

Why is the government socializing any of the losses on the loans?  It adds to the government's debts without improving the safety or soundness of the banking system. 
Banks that fail to raise the additional capital - or submit plans within 15 days of how they intend to do so - will be forced to accept government loans in the form of convertible bonds that would charge interest at a rate of 10pc a year.
Truly an investment banker's solution.   Focus not on fixing the underlying problem (recognition of all the bad debts), but on a symptom of the problem (recognition will drive down book capital levels).

By injecting funds as debt, the investment bankers believe you can fool the market into believing that it will not cost the Spanish taxpayer any money (remember:  the government is borrowing at 6%).  

However, why should anyone believe that the insolvent banks will pay interest on the debt and if they do that they are not taking much needed capital out of the banking system?
Madrid has also conceded to demands from the European Commission to allow an independent audit of its banks. 
Ministers told reporters that the banks will be scrutinised by two separate auditing firms, who will determine the value of their property portfolios.
Mariano Rajoy, Spain's prime minister, is said to have accepted the audit in the hope that they will at least provide a degree of certainty for the markets from which confidence can start to be rebuilt....
Ireland tried this twice.  Nobody believes the results of these independent auditors.

If you want the market to believe you, you require the banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.

Absent ultra transparency, independent auditors are just a way to hide the true condition of the banks.
Luis de Guindos, Spain's finance minister, said: "It is imperative to take measures to ensure solvency, and the government has made today the appointment of two entities to value the loan portfolio of banks in Spain." He added: "Without certainty about the solvency of the banking sector, economic recovery is much more difficult."
Spoken like a former investment banker (which he is).

There is certainty about the solvency of the banking sector.  It is insolvent.

What there is not certainty about is the value of the assets that are tied up in the bank's ongoing extend and pretend activities.  It is this uncertainty that makes economic recovery more difficult.

A different Telegraph article included the following
"The government wants complete transparency, clarity is crucial to end any doubt about Spain's solvency," Economy Minister Luis de Guindos told the conference.
If the government truly wanted complete transparency, it would require the banks to provide ultra transparency.

Instead, the government is following in Ireland's path of playing for time and hiding how bad the situation really is.  The only winners from this policy are the bankers.  They keep collecting their bonuses.

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