Friday, May 18, 2012

Spain's government goes all out to undermine depositor confidence

Not only has Spain's governments chosen to repeat the mistakes made by the Irish government in its bid  to restore confidence in its banking system, but it has managed to find new ways to undermine confidence.

The Telegraph cataloged the mistakes.  Mistakes that flowed from not understanding why depositors keep their money in what everyone knows are insolvent banks.

Depositors keep their money in insolvent banks so long as the depositors think the Spanish government will honor its deposit guarantee.  To them the solvency of the banks is completely irrelevant.

Mistake 1:
"Spanish banks have plenty of liquidity. They've been funded for the next two years through the central bank so there's no problem of liquidity at all in Spain," [Treasury minister] Fernandez de Mesa told the BBC this morning. 
"We have had two LTR's from the European Central Bank so they are funded for the next two years."
I guarantee that the Spanish banks are not funded to cover depositors withdrawing 30% of their funds.

The official's statement confuses banks having raised funds to repay the unsecured bank debt as it matures with the capacity of the banks to withstand a loss of depositor confidence.

The intent of the ECB's LTRO program was to address the simple fact that unsecured bank debt investors are unwilling to roll over their debt and reinvest in Spanish banks.

Depositors are keenly aware of the fact that the unsecured bondholders refuse to roll over their debt and that the ECB LTRO program addressed funding repayment.  It was in all the newspapers.

Mistake 2:
He said the recent fears around the health of the country's banks were linked to their exposure to the property market.... 
Depositors are keenly aware of the banks' exposure to real estate and that the property market is collapsing.  Depositors are also aware that the economy is contracting and that there is massive unemployment.  Both of these mean that there is no reason to expect a rebound in the property market.

The official's statement confuses the collapsing property market with why depositors are nervous (this has everything to do with can the Spanish government honor its deposit guarantee).

Mistake 3:
Mr Fernandez de Mesa also sought to reassure shareholders and customer of Bankia, which has suffered a massive fall in its shares this week after reports that depositors had withdrawn €1bn (£803bn) since the bank had to be part-nationalised last week. 
"Bankia is now in the hands of the public sector so it's pretty safe," he said. "We have to distinguish between shareholders and depositors. Depositors are very confident on the future of Bankia."...
Nationalizing a bank does not make depositors confident.  At a minimum, it is a sign to depositors of how bad things must be and the increasing likelihood of the Spanish government being called on to honor it deposit guarantee.  A sign that apparently depositors saw.

Please note, there were heavy deposit outflows from the banks Ireland effectively nationalized.

Mistake 4:
Reports this morning said the Spanish government has hired Goldman Sachs to carry out an independent valuation of Bankia. 
The newspaper Expansion said that the investement bank will review Bankia's and its parent company BFA's books and determine within a month how much the state should inject to refloat the lender, which had to be rescued after its auditor, Deloitte, identified several gaps in last year's accounts.
Thinking that an outsider opining on the current condition of a bank restores depositor confidence.

Both Ireland and Greece tried this (including having BlackRock Solutions offer its expensive opinion), the results were and still are the on-going run on the banking system continued without interruption.

Frankly, if the financial regulators are not willing to require the banks to disclose on an on-going basis all their current asset, liability and off-balance sheet exposure details, they must be hiding something.

Mistake 5:
Madrid last week ordered Spain's 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. 
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 or 45pc of the banks' portfolios. 
Banks were also told to separate their real-estate loans from the rest of their assets in a further effort to ring-fence the problem area.
Everyone knows that the troubled assets on bank balance sheets are not confined to property loans made to real estate developers.  It is not believable that there can be 20+% unemployment and there would not be problems with a consumer portfolio -- credit cards, auto loans, mortgages.

Ring-fencing non-performing property loans is a lot of sound and fury that does nothing to restore depositor confidence.

Mistake 6:
Mr Fernandez de Mesa also defended Spain efforts to improve its public finances and said the government does not need any financial assistance from the rest of the EU. 
"Our level of debt is very low compared to the euro area average. We're pretty confident in ourselves," he said. "We're very aware of the difficulties of Spain and we're taking the right measures to overcome the imbalances in the Spanish economy."

Everyone knows that Spain is having trouble accessing funding from the capital markets.  It is this fact that makes depositors in Spanish banks nervous as they wonder if Spain can perform on its deposit guarantee.

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