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European Debt Crisis

Three graphs that may interest no one but myself


Here are three graphs which may be of interest to no one but me, though they perhaps ought to be: 

The first graph is the Spanish stock market, the IBEX 35[1], which continues to take a pounding. In fact, it has lost 60% of its value from the peak of 16,040.40 reached on 09 November 2007. This amazing destruction of private wealth not only has its understandable impact on consumption – since Spaniards have by now lost their shirts on both their mortgages and their investments; it also bodes ill for any hope of business expansion. If private industry is unable to tap domestic or international markets for credit, and raising equity capital is out of the question, how are businesses of any size to finance growth opportunities?

The next graph is the share price of Bankia since its IPO on 20 July 2011[2]:


Bankia is the poster child for “falling off a cliff”. The stock has already lost 64% of its value and is in free fall. JP Morgan and Nomura Capital have valued Bankia at the €0.20 to €0.30 range[3], which is not much better than penny stock, and which would represent a worst-case loss of 94.5% of value to investors – including the approximately 350,000 Bankia customers, individual and family depositors, who were “sold a bridge in Brooklyn” by unscrupulous sales reps.

The rise and fall of Bankia is a microcosm of the Spanish banking sector. A litany of broken promises, accounting inaccuracies and downright deception have taken this Frankenstein amalgam of mediocre- to atrociously managed savings banks from “perfectly solvent and a great investment opportunity” to needing 23 billion euros in public financing in the span of less than a month.

The total and abject collapse of the bank raises the interesting question of how last year’s “stress tests” could have missed that 5.5 billion euro chasm in their books. Or why that 2011 profit of 309 million euros had to be hastily restated as a 3.03 billion euro loss. Or how the Spanish market authorities and central bank could possibly have authorized an IPO of so dubious and shady a prospectus. Or why there isn’t a massive class action lawsuit seeking redress against management and the regulators.

Not that the rest of the Spanish banking sector is much better off. The free money from the Spanish Treasury[4] raises the zombie bank’s provision of capital against real estate loan losses at 48.9%. This compares with an average of 30% for the rest of the financial sector. Should the new, independent audits by Oliver Wyman and Roland Berger discover glaring holes in the real estate accounting – and it is hard to believe that they won’t – the government will have to rescue more banks.[5] Standard & Poor seem to think so, which is why they hammered five more Spanish banks with further downgrades, including Bankia, reducing them to junk bond status.[6]

Further recapitalizations and perhaps nationalizations are already being baked into market assumptions. Various sources report that expectations of demands on public funds exceed an additional 30 billion euros, with only Santander, BBVA, CaixaBank, and Banc Sabadell avoiding the need for public funds to meet current provisioning targets.[7] Assuming that those provisioning targets are not raised – for a fifth time – in the never ending circus of non-performing Spanish real estate[8].

With 23 billion euros going to Bankia, another 30 billion euros expected for further recapitalizations of the financial sector, the capper comes with Catalonia requesting central government assistance for 13 billion euros of regional debt refinancing to meet obligations until the end of the year. Markets are justifiably worried. In fact, they are tearing their hair out at the roots. If Catalonia, Spain’s wealthiest province, is technically bankrupt and clamoring for help, what can be expected of Andalucía, with an unemployment rate of 35%? Or Valencia, which sold 6 month bonds at 7% on 03 May??? 

The 10-year Spanish bond has passed the magic “500 bps spread” with the German bund. It is nearing its historic maximum with no ceiling in sight and nothing but more bad news on the horizon (i.e. unemployment data, GDP data, Social Security Fund deficit, the list goes on…).

Investors in Spain are flocking…to leave. In April 2011, foreign investors held 53.7% of Spanish debt. A year later, that proportion was down to 37.31%. Italy has suffered a similar investor flight[9]. No wonder Spanish banks have been the largest beneficiaries of the ECB’s LTRO operations: they’ve been massively supporting the price of the Spanish bond. That seems unlikely to continue. Although the Spanish Treasury has covered some 55% of its 2012 financing needs, at an elevated price, it still has 45% uncovered and with little appetite for further massive interventions at the ECB. In fact, Kanzlerin Merkel is actively pressuring the ECB not to buy Spanish bonds in the interest of keeping the pressure on Spain for more reforms[10].

No one believes any longer that Spain can make the “relaxed” deficit target of 5.8% of GDP this year, not even the government. The 23 billion euros for Bankia weren’t baked into even the worst case scenarios for this year’s financing needs. Bear in mind that Mr. Rajoy’s savage austerity budget saved 30 billion euros at the cost of punitive tax hikes and slashing needed investments to the bone (see my article here).

The expectation that the Autonomous Communities will be able to reduce their deficits from almost 3% of GDP to 1.5% of GDP is ludicrous. Consider that they failed to reduce it by even 10 basis points[11] from 2010 to 2011. While Mr. Rajoy has been busy blaming the opposition Socialists for the failures of discipline with the regions, the fact remains that the majority of the regions are in the hands of Partido Popular majority or minority governments. Six of the seven most indebted regions have been in Popular hands for over a year. Meanwhile, the regions governed by the Socialists and Nationalist parties rank rather well:[12]


Mr. Rajoy has not only lost the confidence of markets and the confidence of his European partners, he has even lost the confidence of (many of) his conservative supporters. The most common adjective used to describe the Rajoy government on conservative periodicals like Expansión or radio like Intereconomía is “disappointing”.

The best thing for Spain now would be the prompt arrival of a contingent of “men in black” from the IMF-ECB-EU to supervise the dodgy state of affairs. At the very least, it would restore some semblance of market confidence, whatever the effects may be on Spanish pride. Because we all know what pride cometh before.

Sources and Notes:

[1] MarketWatch
[2] MarketWatch
[3] “Más golpes a Bankia: Nomura y JP Morgan valoran la acción entre 0,2 y 0,3 euros”, Cotizalia, 28 May 2012 (Spanish only)
[4] The money being provided comes as equity capital, not a loan, meaning  Bankia doesn’t have to repay it, and the Spanish state carries all of the risk of loss if the stock becomes worthless since equity is only repaid after debt has been covered (which means it is unrecoverable)
[5] Segovia, Eduardo, “Bankia marca el nuevo estándar para el sector: cobertura del 50% para el ladrillo,” El Confidencial, 26 May 2012 (Spanish only)
[6] Foxman, Simone,“S&P Slashes Ratings of 5 Spanish Banks,” Business Insider, 25 May 2012
[7] “Los daños colaterales de Bankia: la prima se sitúa en los 510 puntos y los bancos arrastran al Ibex,” Cotizalia, 28 May 2012 (Spanish only)
[8] Smyth, Sharon and Callanan, Neil, “Spain Delays and Prays That Zombies Repay Debt,” Bloomberg Businessweek, 28 May 2012
[9] “Foreign Investors Shun Italy and Spain,” Euronews, 23 May 2012
[10] Beesley, Arthur, “Rising Spanish borrowing costs add to funding fear,”, Irish Times, 29 May 2012
[11] “Ranking the comunidades autónomas incumplidoras con el déficit,” Expansión, 27 February 2012 (Spanish only)
[12] Bank of Spain data for 4th quarter 2011

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