The long hot summer of the Spanish banks is just beginning and financial industry observers say the independent audit just carried out will only cool things down to a limited extent.
The auditors’ reports estimated Spain’s lenders will need a bailout of between 51 and 62 billion euros to keep their reserves up in the face of post property bubble bad loans.
Economy Minister Luis de Guindos said: “We believe this data will be extremely important in terms of knowing what the real situation is and eliminating the uncertainties that exist over Spain’s banking sector. From there, we can see what the whole process of financial assistance could be for the Spanish banks.”
The 51 to 62 billion euro figure is based on limited falls in property prices and contraction of the Spanish economy, but the auditors also calculated a worst case scenario which showed up to 250 to 270 billion euros in bank losses.
The lower figure is what appeared in the headlines, but some commentators said we should be looking at the higher numbers .
On the streets few have a good word for the banks or politicians. One typical comment was: “They have destroyed everything. They have wasted everything and they keep on doing it. I guess we need the money, but it is going to be useless if it is the same people who are going to manage it, whatever Europe does.”
Having completed the audits, and found out what may be the worst, Spain can now formally request eurozone bailout money from Brussels but that is just one step in a long road towards cleaning up the country’s banking system.
More detailed audits are currently underway with the results to follow in September, hopefully without any more bad news to come.
“To talk about the Spanish bank stress tests, we’re joined by José Carlos Díez, Chief analyst with Intermoney in Madrid.
“In the end the totals were more than the International Monetary Fund’s estimate and less than the 100 billion euros promised by Brussels. How should we interpret that? And how much should Madrid ask for?”
José Carlos Díez, Intermoney: “First, the audit was done by two independent companies and that makes it more credible. I think it was better structured than the audit done last year for the European Bank Authority and the stress tests are more like those done for the US Federal Reserve, and they are more efficient, so it’s better in that sense. The problem now is that this has limited usefulness. I imagine the government has all the information, but now there has to be a plan, which is what Brussels has asked for, bank by bank. A roadmap has to be prepared and presented, with a concrete plan, that the investors can understand, analyse and evaluate “
euronews: “The Spanish government appears to be moving under pressure from its European partners. In principle, a formal request must come on Monday. What happens next?”
José Carlos Díez: “Once the country has officially asked for help, the Eurogroup and other countries must ask the European Commission to prepare a memorandum and this memorandum must contain all the details: the conditions for aid, the amounts, the interest rates, the timetable, if it will involve the EFSF (European Financial Stability Fund) or the EFSM (European Financial Stability Mechanism)? As the saying goes ‘the devil is in the details’. We’ll have to see the memorandum to know whether the plan can be successful.”
euronews: “Exactly – one of the questions is whether we can help the banks without that counting as state help, which Angela Merkel’s government in Germany is opposed to?”
José Carlos Díez: “We’ll see. It is said that politics is the art of the possible, but the regulations are quite clear. They are that the country must seek assistance and it has to be via the FROB (Fund for Orderly Bank Restructuring), a 100 percent Spanish state entity. The other thing is that there is talk about changing these regulations and, in the future, having an EU credit union that can directly provide help to a financial institution. But, for now , the rules of the EU’s European Stability Fund don’t allow that.”
euronews: “And, finally, will this lower the risk premium and the interest rates of Spanish government bonds?”
José Carlos Díez: “It depends. The truth is that the audit alone is not enough and there are other problems linked to the risk premium for Spanish debt.
“We wanted – in Europe, and internationally – to believe that all the problems of the euro crisis come from the Spanish banks. It would be great if the whole euro crisis were that simple!
“With regard to Spain, we can say – as the character ‘William of Baskerville’ said in Umberto Eco’s novel ‘The Name of the Rose’ – you could burn all the Spanish banks at the stake, but the problems will continue. The euro crisis is a very serious crisis, in the midst of a very serious recession in Europe.
“The economic indicators show Germany is already in recession. Europe’s economic policies are heading us directly into a depression, as happened with the US in the 1930s. We’ll see if Angela Merkel and her government realise this and will change the economic policy. Otherwise, the outlook is very negative.”