The US stock market rebounded on Friday. And there’s been a small bounce for European markets this morning.
Yet the excitement in the eurozone shows no sign of letting up. Investors were just getting accustomed to Greek woes and German fireworks. Then Spain jumps back onto the radar screen.
Over the weekend, the Spanish central bank stepped in to take over one of the country’s regional savings banks, or ‘cajas’. For now, the bank, CajaSur, will have more than €500m injected into it.
In itself, the story is not huge. But the problems it points to with the rest of the Spanish banking system – not to mention the eurozone’s – are far more worrying…
Reforming Spain’s banks could be costly
Spain’s ‘cajas’ account for around half of the country’s outstanding loans. During the boom years, they boosted their lending more than five-fold, reports Bloomberg. As the property market in Spain collapsed, bad debts rose, leaving many cajas in a deep hole.
The weekend’s seizure of CajaSur, in the southern city of Cordoba, is the first under a state-funded rescue scheme. Standard & Poor’s reckons the end bill could be up to €35bn. The bank had been trying to merge with a better-funded, profitable peer, Unicaja. But the board couldn’t agree a deal, so the Bank of Spain stepped in.
Fund manager Alberto Espelosin tells Bloomberg that this could be good news. “This is a relatively small bank. I prefer to see it as something positive. It’s the start of a process of restructuring of the banking industry which is very necessary.”
He’s right. There’s no doubt the banking system needs to be restructured. However, as FT Alphaville notes, others aren’t quite so sure the process will run smoothly. Credit Suisse’s Santiago Lopez Diaz reckons this “is quite negative news for the financial system, for the sovereign risk profile and for the economy in general.”
For one thing, the restructuring could cost a lot more than the €500m-odd already being pumped in. More importantly, as restructuring continues, banks “might be less willing to lend”. And as the banking system shrinks as a result of mergers, there will be “less overall credit available”.
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That’s not a catastrophe on the scale of the banking system collapsing. But it’s won’t help Spain’s economic recovery. And the trouble is that Spain’s not the only eurozone member with a flaky banking system.
Can Europe really afford to bail out Greece?
Wolfgang Munchau makes a very good point in his FT column this morning – we can’t be sure that Europe actually has the money to back its ‘bailout’ promises.
It’s “no accident that the eurozone created a special purpose vehicle (SPV) to manage this bailout.” As he points out, SPVs were used by banks to sell subprime mortgage debt. They were off-balance-sheet, so effectively allowed banks to stretch lending capacity further than their finances would normally have allowed. And there are “substantive parallels” between subprime and today’s crisis in the eurozone.
As we noted here last month (Why Greece could trigger another financial meltdown), when the single currency was adopted, Germany effectively loaned its AAA-credit rating to every other eurozone country. So Greek debt – like a subprime home loan – suddenly went from being rather risky to being a ‘safe’ investment.
Then the true state of Greece’s finances became clear. And everyone realised that Greece wasn’t Germany at all. That’s what triggered the panic in the first place. And now the SPV is meant to stand behind those dodgy debts.
But can Europe afford to? As the International Monetary Fund has regularly pointed out, and as Spain’s experience shows, Europe is well behind the US and the UK in terms of writing down bad debt in its banking system.
Germany’s banks have problems too
The German Landesbanken – Germany’s regional wholesale banks – for example, are very fragile too. During the boom, they ended up stuffed full of the very worst subprime rubbish. Even now, according to Munchau, “credible reports” suggest that these banks are in a worse condition than anyone wants to admit. “Last year, a story made the rounds in Germany, according to which a worst-case estimate would require write-offs in the region of €800bn – about a third of Germany’s annual GDP.”
Even if that’s an exaggeration, it still makes the €440bn bailout SPV look like a very hefty additional burden for the eurozone to carry. “I suspect that for as long as those Landesbanken and cajas stay unreformed, investors have good reason to treat the eurozone in the way they should have treated subprime CDOs.”
This fragility is a recipe for volatility. After last week’s panic, we might see markets rally this week. But investors need to be prepared for more frequent nasty surprises in the coming months.
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