Investors were hoping that Spain’s fourth attempt in three years to draw a line under its banking crisis would finally restore confidence in its financial system. It didn’t. After the measures were announced last week, the yield on Spanish debt continued to rise (as prices fell).
The basic worry is that “capital injections and nationalisations… may put public finances on the hook… in the future”, as a Royal Bank of Scotland note puts it. With its debt pile growing alarmingly, Spain can ill afford to put more public money into its banks. Yet the markets fear that it will have to. Spanish banks have been “masters of obfuscation”, says Lex in the Financial Times, while the latest proposals from the government don’t go far enough.
Madrid wants banks to set aside another €30bn to cover potentially bad loans to property developers, while it will make up to €15bn of state money available to help banks meet stricter regulations. Moreover, independent advisers will review bank balance sheets. Spain has again failed “to take the banking bull by the horns”, says Simon Nixon in The Wall Street Journal.
Few believe that the new provisions are enough. Provisions now cover around 45% of the €325bn of problematic real-estate loans in the system. UBS reckons coverage needs to rise to 60%. Not counted in the proposals were the half trillion or so of mortgages banks are sitting on, to say nothing of corporate debt. Only 2.8% of the mortgages are classed as non-performing, says Miles Johnson in the FT. But with house prices continuing to plummet, the economy in recession again and unemployment at 23%, the figure will soon rise.
It hardly helps that banks have recently sharply increased their government debt purchases, adds Fxpro.com. So if the government has to inject more money into them, public debt will rise and the banks’ position will be undermined further. Talk about a “deadly debt spiral”.
Meanwhile, notes Nixon, the independent audit won’t be as thorough as those carried out in Britain or Ireland. Spain is set to miss its 2012 budget deficit target of 5.3% amid a deepening recession, and bond yields – Spain’s implied borrowing costs – are at unsustainable levels. So it may not be long before Spain becomes the fourth European country to need an official rescue.