Bad Bank

It's no shock that the Spanish housing market is horrible but hope has been, following the government's nationalization of various banks and creation of the 'bad bank' to soak up all the toxic crap those banks had on their books, that a recovery could blossom. It appears not - not at all. Not only are bad loans rising at record rates with house prices remaining down over 40% but now Reyal Urbis has filed for insolvency making it the nation's second largest bankruptcy as dozens of smaller firms have failed. What makes this so important is the fact that the banks were unwilling to refinance the debt - seemingly comfortable with liquidation - summed up perfectly: "Many loans were refinanced one or two years ago, in the hope that things would get better, but it has not been the case and there is now more realism about the situation. Why would you extend a new loan today?" A good question, one that Tepper's Appaloosa will be pondering as its EUR450mm loan looks in trouble.

With the US closed today, the Shanghai Composite red after a week of partying not helped by news from China’s Ministry of Commerce showed that spending during the week-long Lunar New Year break grew at the slowest pace since 2009, and the Nikkei merely a tick-for-tick proxy of whatever the USDJPY does which in turn is a mood indicator for how any given G-7/20 statement is interpreted, the only relevant news in today's thinly traded market would come from Europe, where the EUR is once again modestly higher in overnight trading, even as Spain and Italy bonds are selling off.

Europe Q4 GDP declines 0.6%, and economy contracts 0.9%. No one should be surprised at the latest disappointing European GDP numbers, but they hide important trends – Germany’s Q4 0.6% GDP drop was worse than expected, although the expectations remain for growth later this year. For the rest of Europe the numbers were generally worse than expected – and no one credible is talking about significant growth prospects. (Sure, the Euro Elites are telling us they see growth tomorrow.. but tomorrow is always tomorrow..) My current interest in Spain was pricked by Blackrock CEO Larry Fink’s comments to ABC following a visit to Madrid. He reckons “Spain will be a star economy if reforms continue.” Spain last ran a balanced budget in Q1 2008 when growth was 2%. Now the economy is shrinking 1.7% on an annualised basis.” That’s a massive amount of catch up to be achieved. We are looking at another 3-4 years of economic misery just to get the Spanish economy back into the EU’s 3% deficit/GDP groove. Then we’re looking at on-going relative poverty for Spanish workers within Europe. At some point... something has to give...

Mussolini Would Call It Fascism

For the green-shoot-minded, last month's albeit record high Spanish bank loan delinquencies was occurring as its first derivative was slowing. Well dash those hopes as this month sees bad loans not only rise to record highs (above 11% for the first time in history) but the pace of this drastic deterioration accelerated at the fastest pace since June. We are sure somewhere a Spanish finance minister is eschewing the 2nd or 3rd derivative as an indication that the worst is over but reality is that as FROB proudly notes the number of banks who have invested in its bad bank - in a strange and twistedly ironic reacharound whereby the bad banks themselves (all domestic, no foreign, Santander 16% stake!) are buying up the assets of the nation's bad banks - the sheer size and scale of this level of bad loan and deterioration (double in two years) is far beyond anything the sovereign's bad bank is prepared for. Of course, none of that matters as Draghi's magical OMT remains the ultimate backstop to any reality emerging. Spain - getting worse, faster.

 As I mentioned before, without a doubt 2013 will be a disastrous year for the global economy and for the financial markets. Things could get ugly before then due to any number of issues that are boiling just beneath the surface… but barring any sudden developments, most of the key players will try to hold things together into year end.

Since the financial crisis erupted in 2009, it would appear that Spanish banks saw the writing on the wall early on. Following the path laid out by their American cousins, the following chart suggests that en masse a decision was made that bigger was better (and safer) as the Too Big To Fail model was clearly the industry standard. From 50 major entities, the Spanish banking system is now dominated (well pre-total collapse that is) by 14 considerably larger firms. This is about the most literal definition of the old saying: "TBTF or bust." Although in this case it is "and"... Because the bigger the firm, the more systemically entwined it becomes and the less capable the government is of letting any pain actually occur... quite remarkable. How long before there is just one big Spanish bank? (bad bank, worse bank, worst bank, all coming soon).

Things are so bad that the ECB has put the entire Spanish banking system on life support to the tune of over €400 billion Euros. To put this number into perspective, the entire equity base for every bank in Spain is only a little over €100 billion.

Greece and the grand machinations of the European Union came to mind as it occurred to me that all of the fine points aside; Greece had become a ward of the State. The math doesn’t even add up so it can be said that it was a poor attempt at hide-and-seek but we suppose it was the best they could do given their skill-set these days. As you watch the antics of the politicians in Spain you realize that they are first cousins to the Greeks. Prime Minister Rajoy and his merry band of henchmen are playing the same tunes as we have all heard before. The reasons that Spain has not come begging for alms yet is not too complicated. They don’t want to be audited by the Troika, God forbid, they want no one peering at the actual state of their Real Estate market, they don’t want anyone but paid flunkies examining their banks. The ECB will save the world subject to the decisions of Europe’s political leaders. Saving the world is a good thing and keeps getting promised by virtually every religious leader for the past several thousand years; the second Spanish Inquisition is about to begin and the zealot may be found wanting.

All analysis of the EU boils down to one idea: will Germany foot the bill? The truth? Germany cannot and will not. Never in history has a country accomplished what the EU bulls claim Germany will do.

Unwilling to sacrifice their sovereignty at the altar of the ECB's contingent OMT (and unable to wrench 'help' from their previously colonized friends in Latin America; it seems Rajoy and friends are more than willing to sacrifice their actual land... and citizenship in order to maintain their 'independence'. Reuters reports that Spain is considering offering rich investors from countries such as Russia and China the right to settle in return for them buying up property in the stagnant housing sector. For buying property worth as little as $200,000, wealthy foreigners could be offered a residency permit, the country's commerce secretary said on Monday. This is the same nation with near 11% loan delinquencies, greater-than-50% youth unemployment, and a bad-bank loaded with heavily discounted real-estate assets that are still too expensive to encourage investors, and an ever-present devaluation risk hanging over its paralyzed economy. We wonder how the other nations of the EU will feel about Spain 'diluting' the citizen-asset pool with this new non-tax-paying, non-labor-utilizing 'wealth'. How long before Greece sells plots on Santorini (w/passport)?