As we pointed out yesterday when we correctly summarized that "Spain Appears Unsure What A "Bank Bailout" Means", we said "Spain is to require its banks to set aside more provisions (between EUR20 billion and EUR40 billion) in an effort to overhaul the country's financial sector. This additional need for reserves (or provisioning) puts yet more pressure on the banks' balance sheets as it comes on top of the already EUR54 billion that has been set aside from February. Interestingly the EUR20-40 billion still falls dramatically short of Goldman Sachs' estimate of an additional EUR58 billion that is needed to cover reasonable loss assumptions. We can only assume that the game is to create as large a hole as is possible without tipping the world over the brink and then fill it with the state funds a la TARP (as Rajoy has indicated will be the case)." Well, as it turns out there was no ulterior motive behind the stupidity which is merely ad hoc improvisation of the worst kind that we saw back in Greece in the summer of 2011. Because according to IFR, not only is the bailout going to be woefully insufficient, but also, will be a 100% dud, as "Spain is likely to offer some banks the chance to opt out of some of the reforms set to be announced on Friday following heavy lobbying from the industry, according to two people familiar with discussions." In other words an insufficient bank sector nationalization, which will affect on some, but not those who actually need it, in what is now so clearly just another exercise (think stress test) to give the impression that the Spanish banking system is solvent. In the meantime, absolutely nothing will happen with the hundreds of billions of underwater mortgages carried by the big banks, which will merely fester until they finally become the Fed's problem.
The opt-out clause could leave analysts and investors disappointed. Although the larger banks have proportionally fewer bad assets compared to their smaller rivals, and have made some provisions, by allowing an opt-out, concerns could remain about the sector.
“All the Spanish banks are in a difficult position and they all have to do provisions, but some are in a less difficult position than others,” said one of the sources, an advisor to Spanish banks. “Banco Popular, Santander and Sabadell do not want to be part of a bad bank scheme as they feel they have already heavily provisioned and are near to reaching their targets.”
The latest impasse came when the plan put forward by Bankia, a product of Caja Madrid’s merger with six smaller savings banks, was initially rejected by the Bank of Spain. “Bankia was too big a problem to be offered to others,” said the lawyer. Therefore an extra special solution was required for the institution, which requires an estimated €10bn of capital, probably via issuing CoCos to the government.
This will have implications for others by the creation of separate real estate asset vehicles. The sales processes of smaller banks, such as CaixaCatalunya and Banca Valencia, will continue.
The larger banks will not have to set up such vehicles though. “It will probably not be compulsory for all but Bankia,” said the lawyer.
So far, Madrid has been resistant to an Irish-style bail in from the European Union. Ireland was effectively pushed along this path after funding in its entirety the National Asset Management Agency, which bought its banks bad assets arguably at too high a price. Such a solution would mean the country added to its growing debt pile significantly prompting fears of a bailout.
“The Spanish banking problem so far has just been contained within the banking sector,” said another advisor. “If the government steps in it then becomes a government issue and it doesn’t want that”.
The government is likely to propose that banks under the programme create a separate Asset Management Company, according to the source. Banks will then transfer all their bad assets into these companies.
“The difficulty will then be pricing these assets. They need to be a fair value to attract investors”, said the source. “However this could involve not just asking the banks to provision but also to take a loss”.
The aim is to sell more than 50% of these assets to third party investors at which point the banks will become minority shareholders in these vehicles and will no longer have to include the companies’ valuation on their balance sheets.
However with little appetite in Spain for these assets the Spanish government will likely be called upon to step in.
Actually, wrong. The "difficulty" will be in convincing the Spanish population, of which nearly 25% is unemployed, and of whose youth more than half has no job, that taxpayer money should be used, instead of promoting job programs and fiscal stimulus (as worthless as it may be), rather to bailout Spain's banks, all of which will end up being direct beneficiaries of hundreds of billions in Spanish taxpayer funds.
Another problem: this "additional capital" does not exist, and while it would be great to have a magic wand and simply conjure out the money out of thin air, that will not happen, no matter how much the S&P 500 wishes it. And unless the ECB prints, we give this plan about 2-3 weeks before even the increasingly dumber market comprehends how hollow, futile and meaningless the whole Spanish "bail out" is.