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SPAIN TO NATIONALIZE BANKIA LATER TODAY - ABC Source
Spain Says Treasury Is Only Entity Left Able to Get Funding
Prime Minister Mariano Rajoy said the debt agency is the only borrower left in Spain that can finance itself on markets as banks, companies and regional administrations have been shut out.
“Today, the Treasury is practically the only one that finances itself on the markets,” he said in the Senate in Madrid today. Being locked out of debt markets isn’t “theoretical” as it’s “happening to the immense majority of regions, our whole financial sector and most big companies.”
Rajoy once again raised the threat of an international bailout as he seeks to convince Spaniards to accept spending cuts even as unemployment approaches 25 percent. His comments also underline the challenge the government faces as it tries to overhaul the banking industry without overburdening public finances.
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Spain is considering using debt issued by the government or its bank-rescue fund instead of cash to prop up the Bankia group, adopting a mechanism that would free it from raising the money from investors.
The government hasn’t made a decision on whether to use its debt to recapitalize the nationalized lender and will decide in two or three months, a spokesman for the Economy Ministry, who asked not to be named in line with its policy, said in a phone interview today. Prime Minister Mariano Rajoy said at a Madrid news conference today the government hadn’t spoken to the European Central Bank about such a step.
Spain nationalized the Bankia group on May 9, leading the lender with the biggest Spanish asset base to request 19 billion euros ($23.9 billion) of government backing to clean up lending to property developers and other loans such as residential mortgages. The size of the support needed for Bankia, and the implication that other banks may also need state support to repair their balance sheets, pushed 10-year yields today to the most relative to German bunds since the euro was created.
“It’s getting increasingly ugly because of the circularity of the problems,” said Georg Grodzki, who helps oversee $515 billion at Legal & General Investment Management in London, adding that 19 billion euros “now seems too much” for the Spanish government to raise directly in the markets. “The phrase ‘house of cards’ comes to mind.”
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As Spain’s recession deepens, more workers like Juan are being shunted into an underground economy that amounts to as much as a fifth of Spain’s gross domestic product, according to some estimates, with broad implications as the country tries to revive itself, reform its labor market and keep at bay the kind of wrenching crisis that now threatens to push Greece out of the euro zone.
The happy news is that the size of the underground economy means that more Spaniards are working than it might seem, and that the official unemployment figure of 24.4 percent — the highest in Europe — may be overstated by as much as five to nine percentage points, economists say. That has given the Spanish government an important safety valve.
.“Without the underground economy, we would be in a situation of probably violent social unrest,” said Robert Tornabell, a professor and former dean of the Esade business school in Barcelona. “A lot of people are now staying afloat only thanks to the underground economy, as well as the support of their family network.”
The downside is that fewer workers are being taxed, even as many also collect unemployment and social assistance benefits, placing Spain’s government in a tightening pincer of shrinking revenue and expanding outlays. The missing revenue may be as much as €37 billion, economists estimate.
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Egan-Jones Ratings Co. downgraded its sovereign rating on Spain further into junk Wednesday as funding costs rise and the country's banking sector seeks financial aid. Egan-Jones cut its rating on Spain to CCC+ from B, right on the heels of a downgrade from BB- in late May. "As we expected, Spain requested support for its banking sector and will probably need cash for weaker provinces," the ratings agency said in a note. "Assets of Spain's largest two banks exceed its GDP." Yields on Spain's 10-year note hit 6.75% on Wednesday.
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The economic situation of the City of Parla "can not deal with creditors and maintain basic health services to citizens," according to the report of the Audit Chamber of the Community of Madrid, who advised to take measures to continuity of the consistory. However, the City of Parla has denied Monday that is on the verge of bankruptcy.
The report, which has had access, stated that the measures that have been launched this Madrid City Council, which governs the PSOE since the first democratic elections, "not enough" to pay "a debt so high."
In this regard, local authorities summons to articulate "some exceptional plan" to allow continuity of the consistory of the town, which is located at number 54 in population census nationally (130,000 inhabitants) and in ninth place in the Community of Madrid.
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El Pais (via Google translate) reports Government will give a two-year moratorium to end evictions.
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The problem with an eviction moratorium should be obvious. People will have no incentive to pay their mortgages for the next two years. Many people will take that option and it will further stress the Spanish banking sector already deep in trouble.
Idiocy is running rampant in Spain. The Association of Spanish Banks (AEB) thinks the solution to the debt crisis is to build more houses in spite of the fact sales are down by as much as 85%.
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Brief Summary...
- The ministry of public works says "demand by foreigners is critical to recovery"
- Foreign demand is down by 85%
- There are 680,000 unsold homes
Here's an optimistic headline on the Financial Times that could easily be off by a factor of 10 or more: Spain’s banks need €10bn more provisions.
€10bn or €100bn?Spanish banks will need to put aside extra provisions of up to €10bn to cover loans that borrowers will struggle to repay, according to an internal estimate by the Bank of Spain.
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Banks rolled over €200bn of loans because they could not pay debt on time, pretending the loans were current, and the Bank of Spain estimates the risk at a mere €10bn.
Who do they think they are they fooling?
Will 70% of those loans be paid back? 50%? 20%? I don't know but I strongly suggest it sure will not be 95%.
Given the perpetual over-optimism on Spanish bank losses, I estimate there is a 0% chance the losses on this disclosure will be as little as €10bn.
That said, I do not know what the existing loan loss provisions are, but if they are high enough (extremely doubtful), then there is some chance the losses will be on the order of €30bn or so (on the general principle things are typically 300% worse than the optimistic scenario).
This does not factor in losses on Spanish government bonds when Spain eventually seeks a massive bailout. Realistically, Spanish banks are insolvent.
Another Warning Call!
By the way, this is yet another warning call "If you have money in Spanish banks, move it somewhere else immediately!"
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