Tuesday, July 10, 2012

Spain vows to 'deep clean' financial sector

The Telegraph reports that in exchange for unnecessary bailout money the Spanish government has vowed to deep clean its financial sector.

Regular readers know that the only way to deep clean its financial sector is if the Spanish government requires every Spanish bank to provide ultra transparency and disclose all of its current asset, liability and off-balance sheet exposure details.

With this information, the markets can determine what each bank needs to do to clean up its on and off-balance sheet exposures.

Without requiring ultra transparency, Spain is just repeating what has been tried and shown to be a fundamentally flawed exercise in Ireland.

One fundamental flaw is that nobody believes the results as they know that the lack of ultra transparency is a guarantee that says the banks and government are hiding something.

A second fundament flaw is that the banks don't end up dealing with their bad assets.

Under the deal to bailout Spain's stricken banks, the Government must come up with a roadmap of structural reforms by the end of July. 
Spain has pledged to clean up the Spanish financial system and put its economy on the road to recovery after eurozone finance ministers agreed a rescue deal for its banks. 
Early on Tuesday, eurozone finance ministers agreed a package of up to €100bn for Spanish banks devastated by the burst housing bubble.They agreed that €30bn of urgent funding can be ready for Spain's troubled banks by the end of the month....
Regular readers know that a modern banking system is designed not to require bailouts from the government.  With deposit insurance and access to central bank funding, banks don't need bailouts even when they have negative book capital levels.
"This puts us in a position to clean up the Spanish financial system that I think is going to go very deep," said economy minister, Luis de Guindos, following the meeting in Brussels. 
"We must make maximum use of the next 18 months to do this clean up...and bring down debt levels in the Spanish economy."...
Given that the EU has chosen to protect bank book capital levels at all costs, the most that could come from the deep cleaning is a 100 billion euro reduction in bad debt.  Given that independent market analysts think the bad debt is close to 400 billion euros, this is not much of a cleaning.

A true cleaning would be to recognize say 1 trillion euros of losses (not unreasonable given Spain's 24% unemployment).
Under the terms of the bank bailout's draft memorandum of understanding, seen by ReutersThe Guardian and El Economista, 14 banking groups that make up about 90pc of the banking system will be tested for their recapitlisation needs in a review due to be completed by the second half of September. 
"The Spanish authorities and the European Commission will assess the viability of the banks on the basis of the results of the Stress Test and the restructuring plans. Banks that are deemed to be non-viable will be resolved in an orderly manner," said the document.
This plan has zero credibility.
All Spain's banks will have to increase their core capital ratios to 9pc by the end of 2012 and keep them at this level until the end of 2014.....
So much for recognizing any losses in excess of the 100 billion euros.
The draft also states that Spain needs to present a blueprint for structural reforms that will help bring down its deficit. 
"Spanish authorities should present by end-July a multi-annual budgetary plan for 2013-14, which fully specifies the structural measures that are necessary to achieve the correction of the excessive deficit," the draft stated. 
Spain is due to announce package of spending cuts and tax rises on Wednesday. There was speculation that €10bn of cuts would come this year and that the measures would include an increase in VAT sales tax, reduced social security payments, reduced unemployment benefits and changes to pensions calculations.
Bottom line:  Spain's government would rather inflict damage to its society and protect banker bonuses than see the accounting construct that is bank book capital change.

As your humble blogger has repeatedly said, the Japanese model that the EU is forcing Spain to vigorously pursue has never worked and is fundamentally wrong.

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