One bank could bring the country down, warns Rajoy

Spanish prime minister Mariano Rajoy - AFP/Getty Images
Rajoy gave an unexpected press conference

The Spanish government will not allow any bank or regional government to collapse “otherwise the country would fall,” Prime Minister Mariano Rajoy warned on Monday.

The PM made the comments to the press but failed to calm the markets that had reacted to Spain’s biggest bank bailout of 23 billion euros, handed to Bankia last week.

The Bank of Spain estimates the total of potentially loss-making real estate assets left over from the 2008 housing bust to be around 180 billion euros, of which Bankia holds some €32 billion.

“We are not going to let any region or financial entity fall, because otherwise the country would fall,” he said.

Despite the bailout Bankia shares plummeted losing 13% on the Madrid stock market. It has now lost two-thirds of its value since shares were floated in July 2011.

“We took the bull by the horns because the alternative was collapse,” explained Rajoy.

The PM also claimed that most of Spain’s problems stemmed from the crisis in Europe and Greece, more so than Bankia.

“There are major doubts over the eurozone and that makes the risk premium for some countries very high. That’s why it would be a very good idea to deliver a clear message that there’s no going back for the euro,” he said.

However, as voters in Greece seem to be favouring pro-bailout parties in the run up to elections in June, reducing the likelihood of a Greek exit from the euro, the rise in Spain’s borrowing costs shows that investors are still nervous.

Spanish yields have hit their highest level since November and while the London stock market rallied slightly, Spain’s lost two points. The Ibex index is at a nine-year low.

Rajoy once again dismissed comments from French president François Hollande who predicted a mass of Spanish banks will need rescue packages from Europe’s bailout funds.

“There will be no rescue of the Spanish banking sector,” he said.

More downgrades for Spain

Standard & Poor's
Further downgrades for Spain

Ratings agency Standard & Poor’s lowered the credit rating of five Spanish banks on Friday, following the agency’s downgrade of Spain last month.

According to the agency’s statement the downgraded banks are Banco Popular, Bankinter, Banca Civica and the recently part-nationalised Bankia along with its parent Banco Financiero y de Ahorro (BFA)..

“The rating actions follow our review of the wider implications for economic and industry risks in the Spanish banking sector after our two-notch downgrade of the Kingdon of Spain,” the statement said.

Standard & Poor’s downgraded Spain’s sovereign debt rating last month to BBB-plus which included a negative outlook, saying it expects the Spanish economy to contract further both this year and next.

Bankia, Spain’s fourth-largest and partially nationalised earlier this month, was downgraded from BBB- to BB+. The banks BFA rating was also lowered to B+ from BB-.

The downgrade comes as the board of Bankia was holding a board meeting to make plans for its recapitalisation amid reports that it may be about to ask the government for up to 20 billion euros from the state to stay afloat.

The state took a controlling 45-percent stake in Bankia by converting a loan of 4.465 billion euros to its parent group Banco Financiero de Ahorros (BFA) into equity.

The ratings agency also cut its rating for Banco Popular and Bankinter to BB+ from BBB- and reduced its rating for Banca Civica to BB from BB+.

No bailout required for Spanish banks says Rajoy

Rajoy speaking in Chicago
Rajoy speaking in Chicago

Mariano Rajoy has said he does not believe the Spanish banks would need to ask for a bailout from Europe.

“I don’t think so,” the Spanish prime minister said when asked about the current situation in Spain’s banks.

Speaking in Chicago where he attended the two-day Nato summit, Rajoy expressed surprise at comments from new French Permiere Francios Hollande who said he was in favour of a European mechanism to support the recapitalisation of Spain’s banks.

“I don’t really know if Mr Hollande said that, because if he said it must be because Mr Hollande has information that we don’t have,” Rajoy added.

Hollande commented that it would be “desirable” for there to be recapitalisation of Spain’s banks.

These comments come shortly after Moody’s ratings agency cut the ratings of 16 Spanish banks, and Santander UK PLC, by one to three notches due to the effects of Spain’s second recession and the negative outlook on recovery.

Rajoy was keen to point out that his government was taking the necessary steps to ensure a quick recovery.

“In Spain, I think the measures we are taking are the measures that must be taken,” he said.

Rajoy was clear that the cuts he is making are the right ones as are the reforms introduced to the financial system to clean up the banks toxic balance sheets.

“Austerity yes, growth too,” Rajoy said.

“But I would also like a clear, forceful message in defence of the euro project and an affirmation of the sustainability of public debt of all the European countries that are subjected to this talk,” he added.

He also added his support for Greece to remain as a member of the single currency zone saying “I don’t want Greece to leave the euro,”

Forget The Bond Auction, Spain is an Absolute Disaster

Bond auction appeared successful
Is the ECB propping up Spanish economy?

Well the financial world is awash with reports that the Spanish auctions went well. They did not. And you better believe the ECB and other Central Banks were involved in the buying.

Instead, Wall Street is using the auction (and just about every other announcement) to shred and those who sold calls in their usual options expiration games. This has been the norm for years, but the mainstream financial media continues to find “fundamental” excuses for market action that is clearly just manipulation and nothing more.

Case in point, if the Spanish auction went so well, why are Spanish Credit Default Swaps widening? Ditto for Spanish yields (the ten year is back closing in on 6%).

However, ultimately this auction means next to nothing. Spain is an absolute disaster on a level that few, if any, analysts can even grasp.

How else do you describe a country for which:

  • Total Spanish banking loans are equal to 170% of Spanish GDP.
  • Total Spanish private sector debt is near 300% of GDP.
  • Troubled loans at Spanish Banks just hit an 18-year high of over 8%.
  • Spanish Banks are drawing a record €316.3 billion from the ECB (up from €169.2 billion in February).

By the way, Spanish banks need to roll over 20% of their bonds this year too. Good luck with that. I’m sure it will all work out well. After all, the ECB and IMF have the funds to prop up Spain’s €1 trillion economy.

Oh wait, they don’t. In fact no one does. The IMF’s requests for more funds have been rejected by both the US and Canada (you really think Obama will fund a European bailout during an election year?). And the ECB has already blown up its balance sheet to the point that Germany and the ECB are growing hostile to each other (I’m sure this will work out well too).

Forget the auction and the spin being thrown about. Spain is a disaster. Its banking system is a sewer of toxic debts which the Spanish Government has attempted to fix by either merging insolvent banks together or spreading toxic garbage onto the public’s balance sheet.

This might fly in the US (or at least it has so far) where the economy is more robust and diversified than in Spain. But for a country whose housing bubble dwarfed that of the US and which is already posting unemployment of 24% (the highest in the industrialized world) and youth unemployment of 50%+, it’s a tough sell.

Oh, and Spain’s King decided to take time off from hearing about the Crisis to go elephant hunting. That should go over well with the Spanish populace, which is now facing austerity measures when the country is already in a Depression.

Just wait, once options expiration ends, we’ll be back to the fireworks. In fact, smart investors should take advantage of this ramp job to prepare for what’s coming.

By Graham Summers

Graham Summers is Chief Market Strategist for Phoenix Capital Research.

Article Source: Phoenix Capital Research

New guidelines to protect home-owners

Desahucio en España
Eviction protests are frequent

On Friday the Spanish government approved a new voluntary “code of conduct” for banks with the aim of helping poorer home-owners to settle debts and stay in their homes.

The economic crisis has caused a huge increase in the number of evictions which has reached “crisis point”.

The new guidelines will mean defaulting owners can now hand back the property to the lender as a way of cancelling the debt. Mortgage conditions can also be modified for a period of up to 40 years.

Under current rules a bank can repossess a home if the mortgage payments are not up to date and they often demand further payments from the owner if the value of the property has fallen below the amount borrowed. Other “administration” fees are also often added to the debt.

The new guidelines will not protect every home-owner, deputy prime minister Soraya Saenz de Santamaria explained. The rules will apply where all members of a household are unemployed or when the mortgage repayments are equal to, or more than, 60% of the total household income.

“We have adopted these measures in parliament to ease the dramatic situation of many Spaniards, who have lost everything, who have lost their job,” she said in a press conference following the approval of the guidelines.

“Many families, more than one and a half million, have all of their members out of work. These are families that have no revenue and, given their inability to pay their mortgage, are facing eviction.”

Since the property bubble collapsed in 2008 there have been over 300,000 registered evictions, Sra. de Santamaria said.

With the unemployment rate at 23%, one of the highest in Europe, and the governments austerity measures, introduced over last month, many people are continuing to struggle and many are facing the prospect of eviction. However, with so many people in the same boat Spanish solidarity is spreading across the country.

Many times over the last months crowds have gathered where properties are due to be seized, to prevent court clerks and bank officials from gaining access to the property and evicting residents.

The Platform for Mortgage Victims, an association set up to help defaulting owners by staging the protests, says it has prevented or postponed 156 evictions in Spain since it was set up in 2009.

Economy Minister Luis de Guindos announced his plans for new guidelines last month in parliament.

“This situation is a human tragedy. The government is very sensitive to the situation created by the large number of evictions which are affecting a large number of citizens,” he said.

Bank of Spain to sell Unnim

Bank for sale for 1€

The Bank of Spain has today announced their intention to sell Unnim, a loss-making savings bank, to BBVA for the princely sum of one euro.

Unnim, created with the merging of three smaller savings banks, was taken over by the central bank in September 2010 after failing to meet minimum-capital requirements.

It is one of five banks taken over by the central bank following the collapse of the property market in 2008 which left much of the country’s banks with huge debts.

The bank has experienced losses of 953 million euros which will be absorbed by Spain’s bank deposit guarantee fund before being sold to BBVA, the second-biggest bank in Spain, in terms of assets. The fund will also assume 80% of Unnim’s future losses for a period of 10 years.

During the first nine months of 2011, Unnim notched up losses of more than 107 million euros.

BBVA president Francisco Gonzalez thinks the deal is good for both banks.

“This operation is good for BBVA and it is good for Unnim,” he said, adding that it will “help strengthen the Spanish financial system”.

Bids for the struggling bank were accepted until February 20th, with BBVA being picked over bids from Spain’s largest bank Santander, Banco Popular and Ibercaja.

In terms of assets the merger will make BBVA comparable with Santander. At the end of 2011 BBVA had assets, in Spain, worth 309.9 billion euros, while Santander recorded assets totalling 337.8 billion euros.

The central bank intends to sell off several bailed-out banks during 2012, including Caixa Catalunya and Banco de Valencia.

Real-estate challenges in 2012

The Spanish real-estate market faces challenges in 2012 with further financial reforms expected to increase pressure on the banks real-estate portfolios.

This is according to Trends 2012, a survey carried out by CB Richard Ellis (CBRE), which talked to over 200 executives across the sector, all of whom agree that Spanish banks’ surplus stock must be moved before the country could begin to emerge from the crisis.

Of those interviewed a staggering 91% agree that Spain’s banks are not dealing with their real-estate portfolios adequately, and a further 60% think those portfolios will grow during 2012.

Sales figures in 2012 are likely to be similar to last year but smaller deals will be more popular as the corporate and public sector seek to cut costs. Currently, properties in the 100,000 to 120,000 euros price range, with finance available, are seeing the most movement.

“The main task for Spain’s public sector in 2012 is to reduce costs, and in order to do so they need to optimise and manage their real estate assets,” explained Eduardo Fernández-Cuesta, president of CBRE Spain.

“The key to the sector’s recovery is the necessary rationalising of banks’ real estate portfolios. The measures taken by the central government, obliging the banks to amortise assets, point the way forward, but there is still much to be done. The restructuring of the financial system will return confidence and credibility to the real estate sector.”

Experts predict house prices will continue to fall in 2012. However, prices in Madrid and Barcelona are now falling slightly slower than in 2011. Property prices on the Costa del Sol continue to plummet and experts think this will not change until the banks’ surplus stock is reduced.

Eviction “code of practice” needed

Luis de Guindos
Economy Minister, Luis de Guindos

Economy Minister, Luis de Guindos has called for a “code of practice” to be drawn up for banks to help struggling home owners to stay in their home and reduce their debt.

Speaking in parliament today, Sr. de Guindos called for an end to the “human tragedy” caused when a family is evicted, effectively making them homeless.

“This situation is a human tragedy,” de Guindos said. “The government is very sensitive to the situation created by the large number of evictions which are affecting a large number of citizens.”

“What the government is going to try to do is protect a segment of the population, which because of the economic crisis and as a consequence of the errors of the past, may find itself in a very difficult situation,” de Guindos added.

The minister called for steps to be taken to allow defaulting home owners to write off their mortgage by handing the property back to the bank, sparing them from accumulating further debt.

The code will not be there as a get-out-of-jail-free card for everyone with debt problems. It will be there to provide help for families that fall under a definition of economic exclusion, which has yet to be defined. Those that will benefit are likely to be families in the lowest income bracket, or with no income, and with no additional assets.

Official figures show that nearly 43,000 evictions were carried out in the first nine months of 2011, just under 5,000 fewer than the total for the previous year, which was 47,800.

Over recent months campaign group PAH has staged a series of protests on the doorsteps of home owners awaiting eviction. In a statement the group said a code of conduct was not enough to protect families or provide assistance for those already evicted.

“We do not need recommendations but legislation that guarantees that citizen’s fundamental rights will be protected,” the statement said. It also went on to say that appealing to the good will of the banks with a “voluntary” code would not work because these are companies whose only reason to exist is to get maximum profit from it’s customers.

Luis de Guindos is a former Lehman Brothers executive, appointed by Mariano Rajoy, so I have to wonder how on earth he managed to get a job as a government minister in a country still suffering from the damage Lehman Brothers caused.

Lending down 3.3%

Spanish banks lending slowed
Banks are holding onto their cash

As Spain continues to be gripped by economic downturn, rising unemployment and possible recession bank lending slowed at a record pace.

In December lending fell by 3.3% compared to the previous year, the largest single drop since Bank of Spain records began 50 years ago. Bad loans represent 7.61% of the total, up from 7.52% in November as borrowing considered “doubtful” rose to a staggering 136 billion euros. Five years ago, before the crisis struck this figure was around 11 billion.

Banks remain cautious about lending with the prospect of a second recession slowing the demand for mortgages. Economists estimate the Spanish economy could shrink up to 1.5% in 2012, while unemployment, currently at 23%, is also likely to increase throughout the year and into 2013.

After the crisis took hold of Spain in 2008 many bankrupt developers and defaulting clients forced the banks to add many properties and building plots to their books. It is these bad assets that are weighing heavily on the banks performance figures.

Speaking on state radio yesterday, Economy Minister Luis de Guindos said that the government is currently engaged with the banks to try to reduce the number of evictions being enforced against people who are unable to keep up repayments. Many of the people affected bought their homes before the crash when prices were higher and borrowing was easy. Some blame the banks for irresponsible lending. Others blame the borrowers for borrowing beyond their means.

Protest and help groups have been set up all over Spain to try and prevent more people being evicted from their homes by the banks. In Madrid this week one defaulting borrower was granted a further eight days in which to pay after crowds gathered around his property to prevent the bank repossessing his family home.

Spanish banks reserve money for real-estate losses

Three of Spain’s largest banks have released details of their plans to comply with government regulations to provide provisions to cover real-estate losses.

Last week, Banco Santander announced that they had set aside €1.8 billion to cover losses on repossessed homes and they now plan to add a further €2.3 billion to this reserve.

Banco Bilbao Vizcaya Argentaria (BBVA) say they will set aside €1.4 billion, which will be added to money it had already reserved before the government regulations were announced.

BBVA made it clear that its good results in 2011 meant it would be able to “entirely absorb” losses in 2012 using this money.

Caixabank also stated it is looking for an extra €2.4 billion to set aside to cover its real estate assets and losses.

Manuel Gonzalez Cid, financial director at BBVA, told Reuters that “These are the strongest banks in the Spanish financial sector so it’s not surprising they can manage the [requirements] through generic provisions or by bringing forward other capital buffers.”

As well as downgrading Spain’s sovereign debt rating this week Moody’s also downgraded Catalunya Banc and Bankia’s debt and deposit ratings over concerns that they are unlikely to meet the requirements for covering real estate losses as laid out by the government.