| Spain - Can it keep on saying no to cuts? |
The collapse of the Spanish property market has left its banking sector exposed in the sense that many loans on Spanish Banks' balance sheets are now considered to be pretty worthless. On the 26th of May Spain's Bankia Group requested a 19bn Euro bail out on top of the 4.5 bn Euros it had already received from Spain's banking bail out fund. This new funding is intended to cover half of the Group's real estate exposure and nearly 13% of its entire loan book. The pertinent question which needs to be asked is whether there are further holes in the balance sheets of other Spanish Banks and what can be done about them? Nomura believes that most Spanish banks will need to find more capital (with the exception of Sanatander and some others). Private capital will not bridge the gap and it is expected that Spain will need to go to the bond market in some way to secure this funding. It is understandably nervous about doing this given that the latest interest rate on its 10 year government bonds is 6.4% the equivalent rate for the UK is 1.8%.
If the trickle of deposits leaving Spanish banks turns into a flood then appropriate action will be needed. Presently the Euro Zone's bail out funds cannot directly re-capitalise banks.There has been debate that the Spanish government could give Bankia sovereign bonds in exchange for Equity and then Bankia could exchange those sovereign bonds for monies from the ECB -- This would be a form of indirect capitalisation of Bankia. It does look extremely likely that external support will be required to keep the Spanish banking sector afloat.
In general economic terms, the Spanish budget deficit in its 2011 accounts was larger than expected ( 8.5% of GDP instead of 8.9%). The key element of this was the lack of budgetary control of its regional governments The regions increased their deficit last year and are now finding it difficult to raise funding.Spain's central government can now control the budgets of regional governments who cannot control their deficits. It is these health,education and infrastructure cuts which are impacting so significantly on Spain's economy which now has 24% unemployment with over half of it comprising of the young unemployed. Sending in commissioners to run poor performing regional governments will be difficult (This sounds familiar?) -- having elections to throw out the poor performing regional administrations will take a lot of time which Spain may not have much of.
Easing the pain in Spain will require much effort in not only securing international funding but also in improving the budgetary performance of Spanish regional government.
No comments:
Post a Comment