Next Up Spain: OpenEurope Looks At Spanish Banks' Underprovisioned 20% In Toxic Loans

Tyler Durden's picture

The only European "thinktank" that has been more correct about predicting developments in the continent than any of its peers ("Greece will never default" - nuf said), has released a new briefing, this time looking at the latest European hotbed of trouble (which is not new at all, just the realization that the LTRO benefit has faded has finally set in), Spain, and specifically if its bank will be forced to seek a Eurozone bailout. OpenEurope is diplomatic about it but the conclusion is that all signs point to yes. Furthermore, as recent general strikes across the country, coupled with occasional rioting, showed, Rajoy's agenda of enacting austerity which will be critical to receive German assistance simply to make Spain the latest German debt slave, may have some problems being enacted. Yet the biggest catalyst for the housing-heavy exposed Spanish banks is that, as Open Europe finds, of the €400 billion in loans made to residential sector, €80 billion is toxic. And only €50 billion in reserves are available. Hence the simple math: at least a €30 billion shortfall will need to come from Europe. And this assume no further declines in home price, which however are set for a record price drop this year. So... LTRO 3 anyone as the focus once again shifts to "deja vu Greece?"

From the executive summary:

  • Given its size, the fate of the Spanish economy will also largely decide the fate of the euro. €80bn of €396bn (1/5) in loans that Spanish banks have made to the bust construction and real estate sectors is considered ‘doubtful’ and potentially toxic, meaning at serious risk of default, with the banks only holding €50bn in reserves to cover potential losses. Already dropping, house prices could potentially fall another 35%, meaning that Spanish banks will almost certainly face hefty losses as more households default on their mortgages.
  • In such a scenario, the Spanish state is unlikely to be able to afford to recapitalise its banks, meaning that the eurozone’s permanent bailout fund (the ESM) would have to step in, shifting the cost to eurozone taxpayers.
  • As domestic banks are currently the main buyers of Spanish government debt, this could also lead to major funding problems for Spain. The chances of a self-fulfilling bond run on Spanish debt would increase massively in this scenario, threatening to push the whole country into a full bailout.
  • Containing spending in the Spanish regions is also key to Spain rebalancing its books. The level of unpaid debt on the balance sheets of local  and regional governments has risen by €10bn (38%) since the start of the crisis (now topping €36bn). This will likely be paid off by the central government, increasing the country’s debt and deficit.
  • Spain’s various reforms, particularly to the labour market, are welcome, but are themselves not enough to stop a bond run, as it will take time before they bite. The country’s long- term unemployment has now reached 9% of the economically active population, and youth unemployment reached 50.5% last month. This is threatening the long term productivity of the economy and whether Spanish society can sustain this level is unknown.
  • A Spanish bailout is far from a forgone conclusion, but more work needs to be done to avoid one. Open Europe recommends:
    • Spanish banks double their provisions against souring loans and commit to thorough stress tests
    • Strengthen labour market reforms, particularly to relieve the welfare burden on state finances, including: end wage and pension indexation to  inflation, reduce size and duration of benefits, limit collective bargaining, reduce redundancy costs and improve the business climate.
  • However, these reforms will only stand the test of time if they enjoy political buy-in from across society in Spain, rather than being imposed from outside.

Full report (pdf)


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theMAXILOPEZpsycho's picture

Name one invention in history that didn't come as a result of brave european collectivism!

We must ring fence spain at all costs; donate if you can.

GetZeeGold's picture



Step right up.....which one of you PIIGS is next?


battle axe's picture

Come on Spain default, all the cool kids are doing it.

GetZeeGold's picture



We're not calling it default anymore. We wouldn't want to scare the masses.


We're just issuing NEW bonds.......want some?


juggalo1's picture

It's amazing to me how the term PIIGS faded from discourse.  I feel like the newspaper editors must have come under pressure to stop using this "derogatory phrase".  Now all we hear are "Southern European countries" or "Peripheral Countries".  I think the tide turned when ZeroHedge coined that STUPIDs moniker and the press started to pick it up.  That one must have charred some balls.

NotAMathWhiz's picture

I think that the MSM was afraid that Greece would drop from the Euro, and they would be left with PIIS.  Of course, the politically correct form would be SIIP, but folks would start hearing those two terms mixed together, and would end up thinking of it as SIIP PIIS.

This would just leave a bad taste in everyone's mouth, so the marketing gurus needed to come up with something else...

fonzannoon's picture

When Greece finally defaulted it had zero impact on financial institutions or the markets. Why not just have Spain default now? Throw in Portugal as a 2 for 1.

maxmad's picture

1 is fine, the Sheeple wont wake up with that... but 2 and the Sheeple start to get restless... 3 and the Sheeple are wide awake...

youngman's picture

It actually did have a big impact....but we just were not able to see was hidden from us in several "tricks" affected them ....just the Bankers and Politicians hid it

GMadScientist's picture

Is that right?

Can I interest you in some Greek CDS?

Sudden Debt's picture

And on your right, you can see the famous dancing monkey!

to bad you didn't see Spain on your left while you where looking but you didn't miss a thing!


q99x2's picture

They don't need a LTRO. Give them the ole stress test. They'll be fine. And, everybody likes the side benefit of no stress. No Stress makes a sheeple sleep better.

mayhem_korner's picture



Just to be balanced, below I present the complete list of Eurozone performing loans:



maxmad's picture

The link must not be working.... none showed up...

Sudden Debt's picture

The Greek CRAP took 2 years to exit the anus... so now we'll get this Spanish crap for the next 2...


maxmad's picture

This time will only take 2 months... They are getting much more profecient with handling these... Pretty soon it will be like a drive thru window at Mcd's

CheapBastard's picture


"home prices...set for a record drop this year."

I'm shocked!

NotApplicable's picture

Simple math? Luckily for them, they don't rely upon anything like that.

Kaiser Sousa's picture

"I was just following orders...."
Prime Minister Banker Bitch Rajoy -

Chester1974's picture

An 11-year-old boy's plan to save the eurozone has been commended in a major competition that has attracted some of the world's top economists.

Why didn't I think of this. 

vh070's picture

So when is the whole Euroedifice going to crack up?  Seems untenable to continue of just split it into two zones.