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Unlike the U.S. and U.K., Spain has been agonizingly slow to acceptthe fact it got drunk on a massive real-estate bubble, exacerbatingand prolonging the hangover now reeling through its financialsector. While it has begun to make amends with new measures aimed atcleaning up the mess, Spain and its troubled regional banks haveyet to recognize the depths of their dilemma by taking thenecessary painful writedowns. Like any psychological problem, first you ve got to admit youhave the problem, said Jan Randolph, director of sovereign riskat IHS Global Insight. Writedowns have been insufficient. Theyneed to bite the bullet harder. As eurozone leaders debate pushing Greece out of the monetaryunion, the markets are expressing serious concern about Spain,which because of its size and troubles remains the most importantcountry in this never-ending debt crisis. Bubble Bleeds Banks Spain s stock market, the IBEX 35, plummeted another 2.66% onMonday, landing at levels unseen since October 2003. The country s10-year bond yields, which move in the opposite direction ofprices, spiked above 6.3% and the cost to insure its debt hit afresh all-time record. The past four years have witnessed a crisis of unprecedentedproportion in the Spanish financial sector in its history, theInternational Monetary Fund said in a report released on April 25about Spain. Reminiscent of the crises that crippled the U.S., Ireland and U.K.,the story in Spain is of a real estate boom-and-bust cycle that isnow causing banking trouble and bloating the government s balancesheet. Home prices have tumbled about 30% in Spain, compared with 35% inthe U.S. and 50% in Ireland. However, unlike in the U.S., pricesare projected to continue to decline in Spain, which reportedly hassome two million vacant homes. Reluctant Writedowns Slow Healing Process Critically, Spain has been much slower to recognize the financialdamage by lowering the value of mortgages held on the books of itsbanks to realistic levels. That may help explain why the markets have widely panned newmeasures unveiled late last week by Prime Minister Mariano Rajoyforcing banks to increase loan-loss provisions on real-estate loansby 30 billion euros, up from 54 billion euros previously. The combined 84 billion euros in mandated provisions pales incomparison with private-sector forecasts for eventual damage fromthe bursting of the real-estate bubble. Moody s ( MCO ) has warned Spanish banks could suffer losses of about 305 billioneuros, compared with a rough estimate of 380 billion euros from theCenter for European Policy Studies, which is a Brussels-based thinktank. The key weakness of the earlier plans has not [been] addressed. ike them, the new plan appears to under-estimate the potentialbank losses, Marc Chandler, global head of currency strategy atBrown Brothers Harriman, wrote in a note on Friday. In another sign of banks unwillingness to take writedowns, Fitchsaid in a note on Monday that banks typically marked repossessedproperties down by about 25% before sales, but the price achievedwas actually often 50% lower than the original loan valuation. While private forecasts for loan-losses dwarf loan-loss provisionsbeing mandated, construction activity is incredibly continuing toexpand in Spain, further complicating the situation. If construction were to continue at the still relatively highrate of today, the process of absorption of the bubble would takemore than 30 years, CEPS researchers wrote in a report releasedlast month. Banking Sector Transforms Despite this backdrop, Spain s big banks like Banco Santander ( STD ) appear to be in better shape than the largest U.S. banks likeCitigroup ( C ) were during the 2008 crisis. That s because these large Spanishbanks are well diversified and don t have the same level ofmortgage-related derivative exposure. The largest banks appear sufficiently capitalized and have strongprofitability to withstand a further deterioration of economicconditions, the IMF said in the April report. On the other hand, Spain s regional savings banks, remaintroubled. Known as cajas, these lenders used to comprise half ofthe country s financial sector but were often influenced byregional politicians. They re very strange creatures that have been used aspolitical footballs by local governors on an empire-buildingmission, said Randolph. In a major revamp, the number of these lenders has been slashed to11 from 45 through interventions, mergers and takeovers, the IMFsaid. By the end of 2012, institutions representing about 15% ofthe system and with assets equaling more than 50% of GDP will havebeen resolved, the IMF said. Last week Spanish authorities seized Bankia, which has about 38billion euros of real-estate loans on its books and is thecountry s No. 4 lender by market cap. Randolph called the move a positive one, saying Bankia is like abad apple and it needs to be cleaned up in order to restoreconfidence in the system. Fitch predicted the measures unveiled last week will spark anotherwave of consolidation in the banking system. The decision torequire banks to transfer foreclosed commercial real estate loansto a third-party that resembles a bad bank provides banks with astimulus to sell property at lower prices, and could push propertyprices down, Fitch said. Public vs. Private Efforts to clean up the banking system are complicated by theincestuous nature between private and public in Spain, a situationthat has only increased with the European Central Bank s onetrillion euro long-term refinancing operations. After gobbling up a record 23 billion euros of Spanish governmentbonds in January, banks in Spain added an additional 20.1 billioneuros in March to give them a record 263.3 billion euros. While the stepped up bond buying helped lower Spanish bond yields,it also increasingly ties the fates of the two sides in a viciouscircle. After all, if government bond prices plunge due to the needfor increased bailouts for banks, banks will need to write down thevalue on those holdings. The market fears that the bank debt will become the government'sdebt, Chandler said. For Spain to restore its health, the IMF said Spanish banks need tocontinue to build their capital buffers, while the government mustbeef up its regulatory framework. It appears that Spain has not yet fully adjusted to the collapseof its enormous housing bubble, which propelled its economy on anunsustainable path until 2008, CEPS warned. House prices haveto fall further and the construction sector as to shrink further. I am an expert from lipolaser-machines.com, while we provides the quality product, such as China Cavitation Slimming Machine , Lipo Laser Machines Manufacturer, RF Cavitation Slimming Machine,and more.
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