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Rescue Efforts to Spanish Banks Deemed Insufficient

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Rescue Efforts to Spanish Banks Deemed Insufficient

  1. 1. QNB Economics economics@qnb.com.qaRescue Efforts to Spanish Banks Deemed InsufficientIn spite of a recent breakthrough decision by the EU to Spanish banks are still reeling under the pressure ofboost their support for Spanish banks, QNB Group toxic assets that have mainly been left over from aargues that planned measures may not be sufficient. property bubble that burst four years ago. HouseholdClarity on the bailout terms and a revival in the ownership increased substantially over the last decade,Spanish economy would be needed to put the banks on to reach over 75%, partly as a result of changing taxfirmer ground, according to QNB Group. regulations which encouraged home ownership. Mortgage related lending is estimated to have reachedThe net borrowing of Spanish banks from the €627bn by the end of 2011.European Central Bank (ECB) reached a record levelof €337bn in June 2012, a seven-fold increase The IMF reported recently that the Spanish bankingcompared to the year before. This excess originates sector’s non performing loans (NPLs) ratio increasedprimarily from the ECB’s decision to offer €1.1trn in from 0.9% in 2007 to 7.6% in 2011, when they totalledtwo tranches during December 2011 and February €136bn of all loans. The construction and property2012 to Euro-area banks at very low rates (1%). sector accounts for 72% of this amount. ECB Loans to Spain and CDS Spreads The EU bailout of the banking sector will come from the Eurozone’s European Financial Stability Facility Net ECB Loans to Spanish Banks (Euro bn) (EFSF), of which €30 bn has already been approved in Spanish 5-yr CDS Spreads (bps) June. Three further payments, totalling €45 bn, are German 5-Yr CDS Spreads (bps) expected to be disbursed over the next year, as the individual banks recapitalisation plans are presented ECB offer of €1.1trn to 350 banks in Dec and Feb 337.2 900 and assessed. A final €25 bn would be made available to buy up difficult to sell debt. 300 287.8 750 In spite of all these measures, markets and rating 250 227.6 599 agencies have remained unconvinced, suggesting that 554 600 the rescue efforts were seen as inadequate. The spreads 200 476 on Spanish government 5-year credit default swaps 526 407 152.4 450 (CDS), a way of insuring debt against default, hit a 357 150 high of 599 bps in May. Even after the latest bailout 118.9 261 300 announcements, it was still as high as 554 bps on July 100 13. A related market signal was the yield on 10-year 69.9 76.0 47.8 112 150 government bond, which recorded a high above 7% in 50 98 85 102 83 79 July. The heightened risk is reflected by credit ratings 41 changes. On June 26th, on the eve of the EU summit, 0 0 Moody’s downgraded both the Spanish government Jul 12* Apr 12 Aug 11 Jun 11 Jun 12 Oct 11 Dec 11 Feb 12 debt and 28 banks. One of the main reasons behind the negative market*As at July 13th, 2012 reactions is the fact that the banking system is large inSource: Bank of Spain, Bloomberg and QNB Group analysis both absolute and relative terms, with assets of over €3 trn, more than triple Spain’s GDP.However, this injection of cheap funding proved to beinsufficient. As a result, on June 9th, the EU offered up New regulatory measures will require Spanish banksto €100bn in additional support. Then on June 29th , it to raise loan loss provisions from the current 7% towent further by agreeing to provide these funds 30%, which in itself will result in a projected €30 bndirectly to the banks, rather than via the already debt- funding gap in banks’ balance sheets. Furthermore,ladden Spanish government. These rescue plans are Spanish banks’ have an estimated €600 bn in bondsjust the beginning, according to QNB Group, as that need to roll over in 2012. The prospects for takersSpanish banks engage themselves in a long drawn seem weak and the costs for servicing the debt areprocess to clean up their balance sheets. increasing. 1
  2. 2. QNB Economics economics@qnb.com.qa Total Banking Sector Assets to GDP (2011) 481% (Total Assets as % of GDP) 472% 342% 320% 222% 124% 110% 98% 71% 70% US Germany Saudi UK Singapore UAE Kuwait Oman Qatar SpainSource: Central Banks, IMF and QNB Group analysisAggravating the conditions in the banking sector is theweak economic and fiscal environment. The Spanishhousing market continues to collapse, with the recentHousing Index reading a decline by 8.3% year-on-yearas at June 2012. Along with this is high unemploymentat 24%, a debt-to-GDP ratio at over 140%, and a fiscaldeficit at 8.5% of GDP. Under such circumstances, themarkets are fair in assessing that much more is neededthan is currently on offer to improve the prospects forthe banking system. QNB Group sees more efforts bythe government in getting the economy back on agrowth trajectory as a key driver to reverse the currentbanking system malaise. 2

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