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The Market Calls BS on Spain's Efforts to Cover Its Toxic Banking Debt

Phoenix Capital Research's picture




 

In a previous article I began delving into the toxic sewer that is the Spanish banking system. At the root of the problem is the previously unregulated Spanish cajas or regional/ local banks which own as much as 56% of all Spanish mortgages.

 

To give you an idea of how bad things are with the cajas, consider that in February 2011 the Spanish Government implemented legislation demanding all Spanish banks have equity equal to 8% of their “risk-weighted assets.” Those banks that failed to meet this requirement had to either merge with larger banks or face partial nationalization.

 

The deadline for meeting this capital request was September 2011. Between February 2011 and September 2011, the number of cajas has in Spain has dropped from 45 to 17.

 

Put another way, over 60% of cajas could not meet the capital requirements of having equity equal to just 8% of their risk-weighted assets. As a result, 28 toxic caja balance sheets have been merged with other (likely equally troubled) banks or have been shifted onto the public’s balance sheet via partial nationalization.

 

The markets are well aware that this policy has only spread the toxic garbage, not fixed it. Case in point, take a look at the chart for Banco Sabadell which was merged with toxic Caja de Ahorros del Mediterráneo or CAM for short.

 

 

The merger increased Banco Sabadell’s size by 75%... and the market saw this as a good thing for a total of two weeks: shares are now down 30% from their merger levels.

 

Banco Popular, which acquired failing caja Banco Pastor, has experienced a similar fate, falling to a new low soon after the merger:

 

 

My point with all of this is that merging one garbage bank with another larger slightly less garbage bank doesn’t solve anything. The market knows this, which is why we see these banks continuing to collapse despite being merged.

 

Having addressed all of this, I firmly believe that no one, not even the Spanish Government has a clue how much toxic garbage debt exists in the Spanish banking system.

 

Moreover, it’s not as though the Spanish Government is heavily incentivized to come clean about the true nature of the Spanish banking system even if it did know the facts.

 

Case in point, the Government just admitted that Spanish banks will need another €29 billion in loan loss provisions yesterday, before revealing that  “problem loans” for the Spanish banking system are now at an 18-year high of 8.15% (€140 billion of the total €1.7 trillion in loans within the Spanish Banking System).

 

Put another way, by the Spanish Government’s own admission (read extremely conservative estimate) nearly one out of every €10 leant out by Spanish banks is probably not going to be paid back.

 

And things are only going to get worse. Spanish citizens (at least those that have money) have been pulling their money out of Spain en masse: €65 billion left the Spanish banking system in March 2011 alone.

 

This flight of capital will result in higher leverage levels for Spanish banks (already leveraged at 20 to 1) and smaller capital buffers with which to address future losses.

 

Put another way, capital is leaving Spain at the very time when Spanish banks need it the most. Indeed, things have gotten so bad that the Spanish Government has limited cash transactions over €2,500.

 

Simply put, Spain’s banking system is an absolute sewer of toxic debts that no one, likely not even the Spanish Government or Spanish Central Bank, truly has a grip on.

 

The few facts that we do know are:

 

  • Total Spanish banking loans are equal to 170% of Spanish GDP.
  • Troubled loans at Spanish Banks just hit an 18-year high.
  • Spanish Banks are drawing a record €316.3 billion from the ECB (up from €169.2 billion in February).
  • The share prices of Spanish banks that were merged with cajas have broken to new lows.

 

None of this is good news at all. Especially when you also consider that…

 

Spanish banks need to roll over 20% of their debt this year.

 

That’s correct, one fifth of all Spanish bank bonds need to be paid off or renegotiated in 2012. And this is happening at a time in which Spanish interest rates are rising. Indeed, the Spanish ten year is approaching the dreaded 7%: the level at which Greece and other PIIGS sought bailouts.

 

The only problem is: Spain is far too big to be bailed out.

 

On that note, I fully believe the EU in its current form is in its final chapters. Whether it’s through Spain imploding or Germany ultimately pulling out of the Euro, we’ve now reached the point of no return: the problems facing the EU (Spain and Italy) are too large to be bailed out. There simply aren’t any funds or entities large enough to handle these issues.

 

So if you’re not already taking steps to prepare for the coming collapse, you need to do so now. I recently published a report showing investors how to prepare for this. It’s called How to Play the Collapse of the European Banking System and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.

 

This report is 100% FREE. You can pick up a copy today at: http://www.gainspainscapital.com

 

Good Investing!

 

Graham Summers

 

PS. We also feature numerous other reports ALL devoted to helping you protect yourself, your portfolio, and your loved ones from the Second Round of the Great Crisis. Whether it’s a US Debt Default, runaway inflation, or even food shortages and bank holidays, our reports cover how to get through these situations safely and profitably.

 

And ALL of this is available for FREE under the OUR FREE REPORTS tab at: http://www.gainspainscapital.com

 

 

 

 

 

 

 

 

 

 

 

 

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Tue, 05/01/2012 - 09:27 | 2387866 waterdude
waterdude's picture

after 6 year, 75% downmove in financial stocks in Spain the guy from Virginia scoops with market with some headlines. Wow, not

 

Tue, 05/01/2012 - 08:25 | 2387725 sodbuster
sodbuster's picture

If I had to guess what will happen- push comes to shove- Uncle Ben will set the paper weight on the F12 button.

Tue, 05/01/2012 - 08:17 | 2387718 Element
Element's picture

We're gonna need a bigger mouse!

Tue, 05/01/2012 - 05:04 | 2387575 cranky-old-geezer
cranky-old-geezer's picture

 

 

Put another way, by the Spanish Government’s own admission (read extremely conservative estimate) nearly one out of every €10 leant out by Spanish banks is probably not going to be paid back.

That's nothing.  I know a government that borrowed $16 trillion and will never pay back a dollar of it.  Now that's some really toxic debt some bank is holding. 

...oh wait, our own Fed is holding it. 

Oh well, I guess the Fed balance sheet is just a toxic sewer of worthless paper like those spanish banks.

Tue, 05/01/2012 - 05:46 | 2387590 Zero Govt
Zero Govt's picture

The Fed is of course a private bank, a very, very bankrupt one holding lots of toxic toys on its balance sheet ..one wonders why the Regulators haven't already shuttered Bennys bankrupt ship/shithole?!!

Tue, 05/01/2012 - 04:54 | 2387569 falak pema
falak pema's picture

banking debt; all over the first world, the heart of the matter, not the public debt. Period. 

Tue, 05/01/2012 - 01:07 | 2387466 carbonmutant
carbonmutant's picture

IMHO the best solution is to use the ECB as a bad bank....

Tue, 05/01/2012 - 05:48 | 2387591 Zero Govt
Zero Govt's picture

that's the plan they're executing already isn't it?

Mon, 04/30/2012 - 23:29 | 2387365 virgilcaine
virgilcaine's picture

It all comes back to declining real estate, the source of global banking misery for Yrs to come.

Mon, 04/30/2012 - 21:44 | 2387174 ptolemy_newit
ptolemy_newit's picture

ok ZH has good reporting, but the comments have spiraled into the shit hole.  where else is there good information with comments that debate or educate?

Tue, 05/01/2012 - 05:30 | 2387582 BigJim
BigJim's picture

 ok ZH has good reporting, but the comments have spiraled into the shit hole.

I've thought they've been pretty good, on the whole... until that one.

Tue, 05/01/2012 - 05:47 | 2387586 Zero Govt
Zero Govt's picture

to be fair it's the Pheonix articles that are recycling the garbage ...it's hard for bloggers to come up with anything fresh to say when the same article is run 4 times a week for a month

Give us a break eh, we're trying!

Tue, 05/01/2012 - 06:37 | 2387606 memyselfiu
memyselfiu's picture

I was going to say, capital outflows in March 2011 are relevant how exactly? What are the numbers recently?

Mon, 04/30/2012 - 23:51 | 2387400 Mugatu
Mugatu's picture

I dunno, I like watching spiraling shit holes.  Its like watching the "Chocolate Wonderfall" at the Golden Corral.  

Tue, 05/01/2012 - 10:40 | 2388086 Treason Season
Treason Season's picture

Never heard of the Golden Corral. I(s it something like the Man's Country in Chicago?

Mon, 04/30/2012 - 21:23 | 2387124 Joebloinvestor
Joebloinvestor's picture

They keep getting merged till they are too big to fail.

 

Mon, 04/30/2012 - 21:41 | 2387169 Buck Johnson
Buck Johnson's picture

Yep, thats the plan.  These mergers are just stalling attempts nothing more, and eventually they will come to the end of the line.

Tue, 05/01/2012 - 05:26 | 2387580 BigJim
BigJim's picture

 A la left vs right, it's just more Kabuki - 'individual' banks are, in essence, just branches of the central bank in our current monetary system.

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