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In spite of a recent breakthrough decision by the EU to boost their support for Spanish banks, QNB Group argues that planned measures may not be sufficient. Clarity on the bailout terms and a revival in the Spanish economy would be needed to put the banks on firmer ground, according to QNB Group.

The net borrowing of Spanish banks from the European Central Bank (ECB) reached a record level of €337bn in June 2012, a seven-fold increase compared to the year before. This excess originates primarily from the ECB’s decision to offer €1.1trn in two tranches during December 2011 and February 2012 to Euro-area banks at very low rates (1%).

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However, this injection of cheap funding proved to be insufficient. As a result, on June 9th, the EU offered up to €100bn in additional support. Then on June 29th , it went further by agreeing to provide these funds directly to the banks, rather than via the already debt-ladden Spanish government. These rescue plans are just the beginning, according to QNB Group, as Spanish banks engage themselves in a long drawn process to clean up their balance sheets.

Spanish banks are still reeling under the pressure of toxic assets that have mainly been left over from a property bubble that burst four years ago. Household ownership increased substantially over the last decade, to reach over 75%, partly as a result of changing tax regulations which encouraged home ownership. Mortgage related lending is estimated to have reached €627bn by the end of 2011.

The IMF reported recently that the Spanish banking sector’s non performing loans (NPLs) ratio increased from 0.9% in 2007 to 7.6% in 2011, when they totalled €136bn of all loans. The construction and property sector accounts for 72% of this amount. 

The EU bailout of the banking sector will come from the Eurozone’s European Financial Stability Facility (EFSF), of which €30 bn has already been approved in June. Three further payments, totalling €45 bn, are expected to be disbursed over the next year, as the individual banks recapitalisation plans are presented and assessed. A final €25 bn would be made available to buy up difficult to sell debt.

In spite of all these measures, markets and rating agencies have remained unconvinced, suggesting that the rescue efforts were seen as inadequate. The spreads on Spanish government 5-year credit default swaps (CDS), a way of insuring debt against default, hit a high of 599 bps in May. Even after the latest bailout announcements, it was still as high as 554 bps on July 13. A related market signal was the yield on 10-year government bond, which recorded a high above 7% in July. The heightened risk is reflected by credit ratings changes. On June 26th, on the eve of the EU summit, Moody’s downgraded both the Spanish government debt and 28 banks. 

One of the main reasons behind the negative market reactions is the fact that the banking system is large in both absolute and relative terms, with assets of over €3 trn, more than triple Spain’s GDP.

New regulatory measures will require Spanish banks to raise loan loss provisions from the current 7% to 30%, which in itself will result in a projected €30 bn funding gap in banks’ balance sheets. Furthermore, Spanish banks’ have an estimated €600 bn in bonds that need to roll over in 2012. The prospects for takers seem weak and the costs for servicing the debt are increasing.


enRescue Efforts to Spanish Banks Deemed image2Aggravating the conditions in the banking sector is the weak economic and fiscal environment. The Spanish housing market continues to collapse, with the recent Housing Index reading a decline by 8.3% year-on-year as at June 2012. Along with this is high unemployment at 24%, a debt-to-GDP ratio at over 140%, and a fiscal deficit at 8.5% of GDP. Under such circumstances, the markets are fair in assessing that much more is needed than is currently on offer to improve the prospects for the banking system. QNB Group sees more efforts by the government in getting the economy back on a growth trajectory as a key driver to reverse the current banking system malaise. 

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