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As I Have Warned, the Fissures Are Widening in the Spanish Banking System
As of 6:40 am, US futures are down 15 points, with the MSM blaming the
nationalization of the Spanish bank CajaSur.
The Bank of Spain seized troubled CajaSur
with 500 million euro ($624 million) in funding to keep it solvent.
The move pushed the Euro lower and left investors concerned about the
country’s fiscal health.
The nationalization comes at a time of
rising concerns over Spanish credit-worthiness, despite the European
Union’s decision earlier this month to put together a safety net for
distressed European economies.
On Sunday, Spanish Prime Minister Jose
Luis Rodriquez Zapatero told a group of socialist mayors, “No one can
doubt at any time that Spain is a strong country and an economic power
that will meet its obligations and pay debts.” CajaSur’s failure is the
second in Spain since the start of the global financial crisis.
The bank — based in the southern city of
Cordoba — has 13 billion euros ($16.35 billion) in loans and holds 0.6
percent of the total assets in the Spanish financial system.
I have made our position on Spain clear through a complete forensic
review of the state’s finances for subscribers:
Spain public finances projections_033010.
An excerpt from this
subscription document (subscribers, reference page 2) shows the
euphoric, yet highly unrealistic optimism upon which Spain has built
its fiscal austerity projections.
As suggested in the document,
if one refers to the blog post Lies, Damn Lies, and Sovereign Truths: Why the Euro is
Destined to Collapse!, you will find that not only has Spain
apparently fabricated a fairy tale of potential prosperity based upon
the projections of the IMF and EC, but the IMF and EC have been nothing
but fairy tale projections themselves.
I have been bearish on the Spanish banking system since January of
2009 (reference
Reggie Middleton on the New Global Macro – the Forensic Analysis of a
Spanish Bank ), and after a trip to the Costa
del Sol by way of Málaga during the
boom times are shortly thereafter, the reasons should be most obvious.
We now have a rash of new Spanish bank and sovereign research which
has returned between 300% and 400% over the last few months.
Needless to say, as the situation in the EU deteriorates upon the
widespread dissemination of the knowledge that BoomBustBloggers have
been trading off of for quarters now, I feel the options will spike in
value significantly!
I invite those who don’t subscribe to BoomBustBlog to please
be sure to peruse our entire collection of free analysis on the Pan-European Sovereign Debt Crisis.
Subscribers should review the ample Spanish research we have amassed
on the crisis, its origins and opportunities avaiable:
- Sovereign Debt Exposure of European
Insurers and Reinsurers - Euro Bank Soveregn Debt Exposure Final –
Pro & Institutional - Euro Bank Soveregn Debt Exposure Final
-Retail -
Sovereign Contagion Model – Pro &
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I think this is ultimately going to result in either a non-enforcement or adjustment of the Maastricht treaty. Contrary to popular belief, the financial incentives for retaining the PIIGS even with bond haircuts is sufficient to hold the monetary union together. I do think a looser requirement (I'd guess 6%) will be accompanied by more robust fiscal controls by the EU. Regardless, the rumors of the euro's demise have been greatly exaggerated.
Reggie - you have been very good on Spain, congrats! The more interesting question from here is: What would make you bullish on Spain?
We all know that most of the "cajas", except perhaps La Caixa in Catalunya, are bust. But at least the government is taking bold steps now, including cutting civil service pay. This may not be the bottom, but this kind of thing doesn't happen at the top either.
bank guy in Brussels
This make complete sense. The alternative is tying your wagon to serial defaulters. It seems that it is better for Germany to take the hit now.
I've been bearish on the Spanish banking system since 2003, specifically based upon the political warfare over the water diversion project, and the massive amounts of development the Spanish banks had planned in the newly irrigated regions of the south. The misallocation of capital was astounding, but it started at the captured political level, much of the real estate and related credit boom in Spain was based upon captured legislators and bureaucrats being paid off by the large Spanish banks, the same banks now insolvent and illiquid. The misallocation came under the prior PM's regime, Zapatero refused to go forward because his cadre were not the beneficiaries of the largess in the forced wealth transfer, and because he came in to power with an already dysfunctional economy and could no longer afford to dole out other peoples' money so readily.
http://www.informaworld.com/smpp/content~db=all~content=a908084513
Spanish National Hydrological Plan: Reasons for its Failure and Arguments for the Future Author: Pedro Arrojo a Affiliation: a IWRA, University of Zaragoza, Zaragoza, Spain DOI: 10.1080/02508060308691702 Publication Frequency: 6 issues per year Published in: Water International, Volume 28, Issue 3 September 2003 , pages 295 - 302The headline was so Reggie. Good work
Reggie
I also lived in Malaga from 2004-2007 and witnessed the credit ramp of astounding proportions for a nation of folks who were never great payers to start with. try collecting debats in Spain....v hard work.
By the way, i reckon DB has major exposure in Spain because i remember a DB retail branch in just about every minor pueblo on the costa del sol...incidentally they were usually right next to a Cajasur!
Good call Reggie.
Thanks.
Austerity is the new dirty word in the MSM. They seem to think austerity is a choice (like sobriety for an alcoholic). It is not that govt's will choose austerity, it will be forced on them! Politicians will always want to belly up to the bar but THERE IS NO MONEY! Most of the world is broke and soon the rest will realize that the loans won't be repaid and quit lending. Austerity is not a choice govt's (societies) will make, it is a punishment for their reckless behavior in the past. We will live through it because we have to, not because we choose to.
Rather than the euro going to zero, my sense on the ground here in Europe is that the Germans are getting increasingly ready to be bold, like they were last week, and that when the next big eurozone crisis phase hits, the eurozone will be led into a split by Germany.
Yes, big German banks will go under with their holding of Club Med debt, but I think the Germans are getting ready to structure even that - it will be amid 'global crisis' conditions so it won't be as radical as it sounds at the moment.
The EU is really four diverse regions (a) UK and Ireland (b) old Communist East (c) Mediterranean countries (d) north Western Continental, including Scandinavia, Low Countries, German- and French-speaking countries.
The Germans increasingly see what is going on and I think they will let the Club Med countries re-structure outside the euro, and lead the richer and better off north-West Continental Europe in a hunkering down with a more solid € currency in fewer nations. France may not necessarily stay, but I think in the end they will keep with the northern euro too.
The EU is past its peak, certainly, and will now start to fade in importance. It will go back to more like it was circa 2002, a trade-zone management system.
I also want to recommend people jump to the other blog post Reggie wrote, mentioned in the article, Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! ... So goes Greece (the numbers are astoundingly bad, no recovery possible), so goes Spain, so goes the Euro.
Sorry, Euro isn't going to parity. It's going to zero.
Eurozone is a political project, not an economic one, and political projects dont die fast in Europe. Those believing in eurozone collapse are just fooling themselves, or dont understand Europe. Or both. Now, I´m not saying it´s good or bad, I´m just saying how it is. My guess is that eurozone will be restructured in some way and southern tier countries will be, most likely, forced out of it. Costs for ditching the euro would simply be way too high.
"Those believing in eurozone collapse are just fooling themselves, or dont understand Europe."
Maybe the existing debt will go "poof", the rigidities will dissappear, the babies you should have had will magically appear, productivity will take off along with an astounding work ethic, people will take care of themselves(refusing government "aid"), and governments will run surpluses.
Oh, poor you. It has to be difficult for you to live with all that hate and euro-phobia. Do europeans haunt you in your dreams as well? All right, here´s an advice. First take a deep breath, then count to ten and read PROPERLY what you´re reacting on. Maybe then, we could have some productive discussion.
I think that there is a lot in what you say Reggie. There are clear problems in the Spanish banking and property markets. I was reading an analysis of the situation earlier on the notayesmanseconomics web blog which as well as posing some comparisons with Japan's property crisis of the early 1990s concluded.
"So the austerity programme increase is likely to impact on Spain’s economic growth adversely. It is also plain I think that Spain was hoping for economic growth to bail out her property market and cajas in effect a type of waiting game. Of course effects from these will feed back into economic growth and indeed Spain’s fiscal deficit. Indeed whilst I type this how different this approach feels to that of Ireland who approached her fiscal and property market problems much more decisively. Before this crisis is over I suspect Spain may end up wishing that she had done the same."
http://notayesmanseconomics.wordpress.com for those interested
Another good piece Reggie. One point. You are not the only one to have had a negative view on Spain. Actually I can't think of anyone who has had a positive view. Possibly a better headline would have been "As I, and many others, have warned.....
I hear you Bruce, but Cookie Monster and Matto bring up some pretty good points below. In January of '09 I don't recall too many touting the Spanish banks are in trouble. Most of the reports I read stated that they may have some issues but they'll handle them. I disagreed then and I disagree now.
That being said, I am not saying I'm the only one. As a matter of fact I stated that all one had to do was take a trip out there and the bubble was quite obvious.
With a 20% unemployment rate, how could it be good.
Curious to know, who out there has published (correctly) negative views in great detail to back up their pronouncements?? Of these, how many are proprietary and only for institutional consumption on the order of $10,000/year subscriptions???
True true, how many provide their own proprietry research from the ground up and make it accessible to retail investors rather than either re-quote other analysts or provide it to institutional investors only?
Bruce - love the research you do too.