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Monday, May 19, 2014

Spanish banks' bad loans look set to weigh on the economy for some time

The Bank of Spain released its latest data on the level of bad loans held by Spanish banks today. For the first time since January 2013, the value of bad loans has dropped - falling from €195.2bn in Feb to €192.8bn in March. However, it has stayed roughly constant as a percentage of total loans (13.4%).

Symbolically, even a small drop in the headline value of bad loans may be seen as important, especially given that previous declines were down to the transfer of assets to the Spanish bad bank (SAREB), rather than any change in circumstances of the loans. If this is discounted, the value of bad loans has simply continued to rise.


That said, as the graph highlights, these loans remain at very high levels and well above the loss provisions held by banks. This continues to tell us that:
  • Spanish banks will continue to deleverage for some time to come. This puts a dampener on any hopes that they will show any rapid increase in willingness to lend and take on more risk to help fuel any form of Spanish recovery. This thereby increases the risk that any recovery will be ‘creditless’, and therefore more likely to be limited and temporary.
  • This data is quite timely, as it also highlights the obstacles which the ECB is going up against in these countries when it comes to encouraging banks to begin lending again, particularly to small and medium-sized enterprises (SMEs). With their balance sheets still weighed down by these loans, it seems likely that banks will continue to be reticent to take on significant new lending, even if the ECB does offer them cheaper long-term loans.
  • Given that many of these loans still relate to the real estate and construction sector, they will continue to weigh on prices in these markets. This suggests prices could fall further (although this will vary significantly based on location and regional markets), while the political hot topic of evictions could return to the fore again in the future.

4 comments:

Anonymous said...

This tells us that Spain, and doubtless other MananaZone nations, are facing decades of stagnation with a high risk of another big downturn.

In the meantime the UK is facing more immigration from basket case economies meaning more risk, cost and problems being transferred to us.

Let's face it. The EU has been a massive failure and has directly overseen the biggest destruction of value in the history of our planet.

SC

Jesper said...

This paragraph from the post explains the problem with universalist banks:
"This data is quite timely, as it also highlights the obstacles which the ECB is going up against in these countries when it comes to encouraging banks to begin lending again, particularly to small and medium-sized enterprises (SMEs). With their balance sheets still weighed down by these loans, it seems likely that banks will continue to be reticent to take on significant new lending, even if the ECB does offer them cheaper long-term loans. "

A bank specialised in business lending would not be weighed down the same way. Big banks are simply bad for the economy. Split them up.

Anonymous said...

Jesper

You miss the point.

The EU has had since 2008 to fix them or come up with a sound methodology and policy for sorting them out.

They have not done so due to a lack of political agreement and will and an excess of incompetence.

Should a business bank or group of business banks in the EU get into difficulties in the future then what exactly will the EU do?!

Nothing.

SC

Rik said...

@SC
The bankunion reserves are simply way too small to finance a major rescue operation. It could hardly hold one larger bank up and non of the biggies.
So when you have a serious crisis it is back to square one.

Let the ECB do it for as far as possible and legally allowed. Both questionamrks.
If not the seperate countries have to do it.

Which means that as the crisis is likely to occur in one of the PIIGS CS a basically bankrupt country. Which is by itself not able to do it. Needs financing itself to pay for it (and guarantees from ECB/North in order of not being dropped themselves by markets).
And a new round of negotiations will start. Basically crisis 1.2 (it is still the aftermath of the current financial crisis. The garbage is as you say still not cleaned up).

These banks have simply not sufficient provisions 12-14% is simply in no way enough. On top of that they have bulk national sov debt on their BS (at blown up valuations).
Stand alone the banks will tear the countries subsequently with them.
So at that point the bankingunion is insufficent and the question gets more Northern guarantees or drop the South.

Question if ECB can hold the fort. Banks will need real capital. Creative bookkeeping looks to be stetched nearly to the max. And from there gets it more difficult by the day simply as loans mature and losses will come to the surface one way or another.
As it looks now simply not within the rules. So it might well be that the rules will be one more time stretched at that point. With the subsequent question will markets buy that (re the banks in question but also re the ECBs own credibility and simply the Norths own creditworthiness (which will also be considerably stretched).