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Mystery Behind Spanish Banks' Extend-And-Pretend "Bad Debt Miracle" Revealed
One of the mysteries surrounding the insolvent, and already once bailed out Spanish banking sector, has been the question why reported bad loans - sharply rising as they may be - are still as relatively low as they are currently, considering the nation's near highest in the Eurozone unemployment rate, and in comparison to such even more insolvent European nations as Greece, Cyprus and Slovenia.
Courtesy of the just completed bank earnings season, and a WSJ report, we now know why: it turns out that for the past several years, instead of accurately designating non-performing loans, banks would constantly "refinance" bad loans making them appear viable even though banks have known full well there would be zero recoveries on those loans. In fact, as the story below describes, banks would even go so far as making additional loans whose proceeds would be just to pay interest on the existing NPLs - a morbid debt pyramid scheme, which when it collapses, no amount of EFSF, ESM or any other acronym-based bailout, will be able to make the country's irreparably damaged banks appear even remotely viable.
It has puzzled Spanish bank analysts for years: Why did the country's mortgage delinquency rate rise so slowly even as unemployment soared above 26%?
A big part of the answer—revealed by a spate of bank earnings reports in recent days—is that Spanish lenders had been making their loan books look healthier than they really were by refinancing big numbers of loans to struggling homeowners and businesses.
The lower interest rates and easier terms of refinancing helped hundreds of thousands of Spaniards like Juan Carlos Díaz, who stopped making mortgage payments more than a year ago, remain in their homes and keep their businesses afloat longer than otherwise would have been possible. It has also helped banks bury a growing risk in their credit portfolios and avoid recognizing losses on debts they are unlikely to recover.
Yet even with this ridiculous "extend and pretend" gimmick, NPLs just hit a new record high as a % of all loans according to the Bank of Spain.
One dreads to even contemplate just how worse this ratio would be if banks were honest in marking loans anywhere close to realistic recovery prospects. One may however soon find out, because new "more stringent disclosure guidelines from Spanish banking authorities are bringing these risks into the open. Partly as a result, mortgage delinquency is rising fast—a trend that could damp recent investor enthusiasm for a bailed-out banking industry rebounding from a property-market crash."
The Bank of Spain, the country's central bank, began forcing banks in April to re-evaluate and disclose their refinanced loan books out of concern that some lenders had been taking advantage of relatively loose guidelines to mask the deteriorating creditworthiness of their clients. As Spain's economic slump deepened, the Bank of Spain said at the time, "Difficulties considered to be temporary in many cases have become structural."
Which is the story of the New Normal in a nutshell: temporary issues revealed to be structural, and in fact worsened by ongoing, relentless central bank intervention which prevents the liquidation and cleansing of tens of trillions in bad debt from the global system. What is worse is that alongside that revelation, it is also about to be revealed that, surprise, Spain is not even close to recovery. Which will kill the only thing that matters in that insolvent continent: the latest dose of confidence.
It does, however, explain why the ECB shocked 98% of economists with its rate cut - recall that it was the soaring NPLs in Cyprus that led to the wholesale confiscation of uninsured deposits in order to preserve the domestic banking sector.
So back to Spain, and the clash of reality with can kicking:
For years following the real estate crash in 2008, analysts say, lenders applied an "extend-and-pretend" approach by refinancing ailing real-estate developers. Ultimately, banks were forced to recognize those losses, spurring last year's €41 billion European Union bailout of Spain's banking system.... It also raises questions about whether banks have continued to sweep under the rug loan losses lurking on their balance sheets, a concern that has dogged the sector since the start of Spain's economic crisis.
The answer, incidentally, is a resounding yes. Continuing:
Refinancing struggling homeowners "only pushes the problem forward without finding long-lasting solutions because in the end, the debts only grow while the borrower's capacity to repay doesn't improve," said Carlos Baños, chairman of AFES, an association that advises mortgage holders who have trouble paying their debts. "These days it's hard to see things getting better unless you win the lottery."
So how exactly have banks been sweeping reality under the rug for over 5 years? Meet Mr. Diaz:
For Mr. Díaz, a 49-year-old account manager at a company that makes chemical pumps, the extend-and-pretend approach worked for a while. In 2007, he took out a €600,000 mortgage on a suburban Madrid home. At the time, his wife's fast-food restaurant in southeastern Madrid was going gangbusters, selling roasted chicken whole and in sandwiches to construction workers during a big housing bubble.
In 2008, the bubble burst, leaving her business with few customers. Her take-home pay dwindled, and paying the mortgage starting eating up most of the household's monthly income.
In 2010, Mr. Díaz asked his bank, Caixabank SA, CABK.MC for help. The bank agreed to refinance the mortgage, allowing him to lower his monthly payments by paying only interest during four years. The lender also furnished him with a second mortgage, for €32,000, to pay off credit card and other bills.
By 2012, the family's finances were stretched so thin that Mr. Díaz began drawing from savings to keep his wife, two children and himself in their home.
In July last year, he stopped paying the mortgages, rebuffing his bank's offer for an additional grace period that would further lower his monthly payments.
Mr. Díaz said he has few good options. "I realized paying the mortgage was like having bread for today and going hungry tomorrow." He said: "Whatever happens now, let it come."
Which is ironic, and funny, because ever more people are saying exactly the same thing about the entire global economy and capital markets.
The reason: everyone - from the lowliest unemployed worker to some of the most respected fund managers - is so tired of the central banks' only remaining scam of asset price manipulating "extend and pretend" that they would rather take the pain now, and force "whatever happens now", instead of live with the reality that "going hungry tomorrow" is an assured outcome for the members of what was once the now extinct global middle class.
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Icann tweets aapl....this cant be legal...oh wait
Just a heads up
it's okay to say negative things about Spain but not if it's about China
Bloomberg News Is Said to Curb Articles That Might Anger Chinahttp://www.nytimes.com/2013/11/09/world/asia/bloomberg-news-is-said-to-c...
hmm.. I do not understand how massive fraud could be so mysterious..
Pretty much that. Why is this any different than the FASB telling banks they no longer have to value mortgages using mark to market?
Indeed. Ever since I became an accountant, I have completely discounted all financial numbers provided by governments and corporations. Because thats what accounting taught me. If someone want to mislead using accounting, it is goddamn child's play. The really sad part is people believing the BS.
It seems organized debtors have all the power. They can wipe out the entire banking sector by simply not paying back their loans. What are the banks going to do forclose on everyone, destroying the housing sector and themselves at the same time. The Ponzi only works if everyone is scared of losing their house, once enough people don't care about losing it or their credit score they are in charge.
OT --
this just in: great news!
CBS-MSM reports that over the weekend 3 hackers in the bay area implemented the new healthcare system!
that is the solution to the reaction that all ZH readers have felt, namely: wow! the problem with health insurance is the website and the user interface!
not: compulsory payment or unfettered gov control of your own person
and that reaction was in response to the "problem" of website-not-working-after-all-that-time-and-expense
it's almost as though the whole problem/reaction/solution paradigm had been staged to manufacture my consent!
well done! and nice GUI!
hey, gui’s are easy as long as you don’t need to access any real data
Someone said a few weeks ago they would just set up what resembles to be a working web site, with 'monkeys in the truck' doing the data entry and heavy lifting.
Didn't Edward Bernays make it prefectly clear that perception was all that was important?
We're riding on illusions anyway, what's yet another illusion?
Boomberg is blocked in China, so cut them some slack on that one.
Obozo and his government are self-censoring vis-a-vis China.
Why would a private company not have the same right?
On another note, Bloomberg removed the health care section from the front page of their website.
If I get that right it's more like a NLP- miracle ... http://en.wikipedia.org/wiki/Neuro-linguistic_programming
More than just Spanish banks. But fuck it. BTFATH
Como se dice...insolvente?
You say, "TBTF."
"¡No pasa nada!"
If you think Spain's non-performing loans looks bad, you should see BAC's.
When it's important you have to lie.
And if you do things like that, people will likely get upset - that's why you would want to do it over a weekend. ;-)
"everyone - from the lowliest unemployed worker to some of the most respected fund managers - is so tired of the central banks' only remaining scam of asset price manipulating"
Take a look at the comments on this Bloomberg article about "Obama Stocks" soaring...
http://www.bloomberg.com/news/2013-11-11/obama-stocks-among-best-after-r...
Earlier today I saw that article and couldn't force myself to scroll past the first paragraph.
Now I went there again to see the comments (I was wondering about that as well), but thankfully Ghostery is blocking them and I thought I'd save myself some frustration and better leave ;-)
Which is more ethical?
The Spanish refinancing to at least give a try for the mortgages to be repaid,
or the US who debases Accounting rules removing any business pressure for the banks to correctly value the homes on their books?
STOP THE FUCKING DISTRACTION AND FOCUS ON THE REAL ISSUES!
Big up-arrow. I'd posted this same thing (later, then seeing your post).
Spain will be served up as the wipping boy for the EU, when we all know that it was the scheme of the big EU planners that set it all in motion (just like the big financial planners in the US). In the BBC documentary on Spain's financial meltdown it was pretty clear that their national banks had not been engaging in doling out tons of money for stupid projects like was being done in the regional sectors: this is not to say that they didn't somehow manage to profit by it, or that they weren't the dog that didn't bark, but they weren't opening promoting this kind of thing, not like in the US.
How about that European VOLUME today???? JUST ATROCIOUS!!! Europe is DEAD in the WATER!!!
We are ALL Dead in the water!!! How can MEDIA NOT point out this indicator???:)
CNBS stopped reporting volume and breadth numbers after the tech bubble, where have you been
hmmmmm...well I'm sure all those MBS the Fed bought are 100% performing...ahem...but how could we verify that...if only there was some way to Audit the Fed.
It's mystery, wrapped in an enigma and smothered with cheeze.
Only the Cheezepopes know the truth
Off balance sheet and not marking to market will be the cause of the decline of civilization.
It's where we hid the realities of insufficient natural capital. Mother Nature is no longer providing credit for growth...
I suppose this is what you have to do when you don't have the luxury of printing $85 billion/month...
Once again we manage to distract our attention away from the biggest con artists operating and kick some lower entity.
BTW - At least Spain's national banks weren't the ones that caused their downfall: it was their regional entities (not under control of the national banks?). Of course, this was all enabled by cheap credit from the Euro zone. I'm NOT defending Spain, just pointing out that they're pikers compared to the REAL con artists (which articles like this assist in distracting attention away from).
We are at least five years past the necessary debt jubilee for the 99%'ers of Western Civilization.
BUY MOAR STAWKS!!!!!
I spent a few years as a bank auditor - every time I saw past due loans being rolled over - they were also rolling over the interest and charging heavy fees - which were also tacked on to the new loan.
I bet if they dig a little the fee income at these banks is also increasing.
What we got here is a failure to communicate. This is nothing but legalized theft.
Funny how everyone (the masses, media and financial 'pros') fall for all this word-smithing, mumbo-jumbo and weasel words, when what is really going on is an ongoing massive transfer of wealth from the 99% to the 1% -- and even there the accumulation is largest in the 0.1%.
Some people -- either out of sheer ignorance, lack of intellect or a hidden agenda -- mislabel the events as "socialist" or even "communist". Neither fully fits the facts, for neither allows the kind of wealth transfer from the Many to the very, very Few. Whatever 'socialist' benefits individual poor people receive is a dust spec, in comparison to the massive wealth flowing to the elite. The poor are literally being "bought" to NOT revolt, by keeping them just above the revolt-level of poverty, while the wealthy keep plundering.
This is a NEO-ARISTOCRACY in the making, using corrupt politicians to create laws for crony Capitalism and assign corrupt Judges to create a crony Judiciary. These Judges and their Kangaroo Courts will be there long after the politicians have been replaced by a new crop.
Well... the good news is that it's only Men Behind the Curtain. The bad news is that that's all that's behind the curtain. The wealth was never there (it was but an illusion to start with- real wealth is from natural capital, and that we tend to consume).
Oh, but the wealth is there, it's just that it changed hands during the great wealth transfer that started in '71...
First they indoctrinated the sheeple into abandoning age-long beliefs of the absolute supremacy of hard tangible assets. A parallel process of awakening primordial greed was launched via mass media. A new generation of instant happiness was born:
"You want to buy a new car but don't have money, sir? No worries, pay 15% upfront and we'll give you credit that you'll get to pay back (plus interest, of course) within 5 years."
Same, or even worse things happened with real estate and small businesses as people pledged mortgage colateral. And the credit bubble grew exponentially, as did human greed. People as a collective believed PTB's sugarcoated stories of GDP growth, welfare and progress. We failed to live within our means and bit the debt bullet. Now it doesn't matter any longer if the ongoing crunch is orchestrated from behind the scenes or if it's a natural occurrence described by entropy. As described in the article, it's trickle-down misery all around that's going on,..
I've been brought up to live within my means, but only in the last 5 years I've completely understood my people's saying "Debt is more scary than the worst beast."
1971 was the year in which PHYSICAL reality started to get paper'd over. There was little new wealth to come forward past this point. Most of all that you saw since then was based on tricks.
"I've been brought up to live within my means"
And if those "means" are WAY above nature's? I'm not ridiculing the notion of being responsible with that that you have, that one is a good manager, but there's still the issue of whether those actions are sustainable. There are 750 million people in India living on $0.50/day- I'm thinking that they are NOT living beyond their means. Bill Gates is also living within his means...
The transfer is not from the 99%, it is from the one third or so that makes up the privately employed middle class. The rest join in the looting of the middle class, courtesy of the government in order to buy their political support for this regime of theft. The 1% may get most but they are not alone in their theft.
Mark Grant ( BTW why are his Out of the Box commentaries no longer on ZH) talked about this and how Spanish bank regulators allowed for 'dynamic provisioning or dynamic something or other when they examined a Spanish bank's books. So, you can be a 'dynamic' zombie as long as your bank cooperates.
This is standard procedure in the City of Denver Colorado..they have urban development loans they make to minorities....they never pay them back but the City will make a new loan to pay off the old one so they can always report that their loans are current and in good standing...that is how a government employee keeps their job...and the minorities get their reperations...
Geez, and I've been laboring under the illusion for over fifty years I had to grow up, deal with reality, be responsible for my actions and pay the price for my screw ups. Evidently, I could have remained a four year old and just "pretended" all along. I feel like an ass.
And what a wonderful world it would be, to have a massive amount of wealth in which to have all the toys you could ever want! Seems that it's always too late that we learn things, like it really does pay to be a banker!
Homeowners refinancing non-payable mortgages on worthless collateral by taking on new loans. Where did I see that before?
"...instead of accurately designating non-performing loans, banks would constantly "refinance" bad loans making them appear viable even though banks have known full well there would be zero recoveries on those loans."
has anyone pointed out that this is exactly what the fed and treasury have been doing to cover government spending for decades?
One could say that you have the cart and horse reversed, that it's how the bankers make their money, by getting the govt to deficit spend: keep in mind that the financial instutions make their money by sheer volume of transactions.
the fraud that keeps on giving-moar debt: serves the goal - ponzi scheme. just a minor inconvience...
Years ago people living on farms had one rule that they understood could never be violated on pain of lingering death - do not eat your seed corn.
That core wisdom has been lost in the US, but it sounds like at least some people in Spain might still understand.
Bernie Madoff would be so fucking proud of these sociopathic Freaks Of Nature <sniff>. A blatant ponzi of this magnitude would bring a tear to his eye<sniff>... Perhaps Rajoy, Draghi and Madoff could all share the same cell so that they could all do the 3-way, Stink-Pipe Shuffle?