Tag: Spain

Categories
Economics

[2560] Scary quote of the day

…consider the grim fact that even â‚¬100 billion may not be enough to put Spain’s banks back on their feet, as they could easily face losses of perhaps three times that amount: Real-estate loans amount to â‚¬298 billion, construction credit to â‚¬98 billion, mortgages to â‚¬656 billion and other loans for families and firms to â‚¬683 billion. Assuming a 50% loss in real-estate and construction loans, a 5% loss in mortgages and 10% loss in other credits to the national private sector, brings us quickly to the worrying figure of â‚¬300 billion in losses. And don’t forget the banks’ additional exposure of â‚¬78 billion to Portugal and â‚¬10 billion to Greece and Ireland, which could add losses of between â‚¬40 billion or more to our calculation.

Spanish banks currently report total equity of â‚¬377 billion, so losses on this scale would leave them with just â‚¬50 billion to â‚¬70 billion remaining in equity. To bring them back to reasonably levels of capital would then require €150 billion to â‚¬170 billion—well above the â‚¬100 billion line of credit… [‘Bail-in’ Spain’s banks, not bailout. Juan Ramón Rallo. Wall Street Journal. June 18 2012]

No wonder yields on Spanish sovereign debt are going up, regardless of Greece.

Categories
Economics

[2557] Did the LTRO fail?

So after the rumor of bailout, the official denial and later the external pressure, Spain has finally requested for a bail out from Europe. The bailout is expected to be utilized, in turn, to bail out Spanish banks. The money will come from either the EFSF or the ESM, whichever is politically expedient.

Even before the request, the Spanish government has already bailed out its fourth largest banks just recently.

I find the bailout in Spain as curious because it raises one question: whatever happened to the LTRO?

Aren’t the LTRO with money worth EUR1 trillion meant to bail out banks implicitly?

Did the LTRO fail to do what it was meant to do, which was to give European banks very cheap refinancing options over 3 years? Did Spanish banks not gain access to the LTRO? What did the Spanish banks do with the LTRO?

Categories
Economics

[2476] Postponing the European crisis to 2013

I am in the opinion that the expected sovereign debt and banking crises in Europe have been postponed to the end of 2012 or early 2013. There are two reasons why I think so.

The crisis in Europe is essentially two-fold. One is due to government debts. Two is the risk of default by European banks. The two sides are interrelated but it is useful to separate them.

The sovereign debt crisis has been postponed thanks to the establishment and the expansion of the European Financial Stability fund. The EFSF would not be exhausted until the end of 2012 even if all debts repayment or refinancing by the infamous PIIGS (Portugal, Ireland, Italy, Greece and Spain) is financed through facility. The potential rating downgrade of sovereign debts of stronger economies, namely Germany and France, may hurt the likelihood of success of on the EFSF front but I will wait until that actually happens.

I am taking this position because by December 2012, total principal and interest payments made by the PIIGS government is projected to be EUR700 billion. That is below the total size of the EFSF.

The following graph shows principal and interest payment obligation of all the PIIGS government cumulatively. Looking at it, without the more permanent European Stability Mechanism which is supposed to kick start in the middle of next year, trouble will come only around February or March 2013.

The banking crisis meanwhile has been postponed until next year thanks to the soft loan facility provided by the European Central Bank. It has been reportedthat banks in Europe will require EUR700 billion next year to pay up their debts. Since the facility offered by the ECB is at the moment limitless (there will be a limit because already the total loans made by the ECB attract considerable question), the problem on this front too has been postponed to 2013.

This of course says nothing of recession and economic recession is another issue altogether.