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Jun 11, 2012 6:00 AM GMT+0800 Spain s request for as much as 100 billion euros ($125 billion) ofEuropean bailout funds should provide the country with enough moneyto shore up its banking system after three failed attempts in asmany years. Now that they have this money, it will hopefully finally bepossible to recognize all the hidden losses and clean up thesystem, Luis Garicano, a professor at the London School ofEconomics, said in a phone interview. The amount sought is about 2.7 times the funds deemed necessary forSpanish banks by the International Monetary Fund in a reportreleased June 8. Spain sought aid for its banks the following day,becoming the fourth euro member to seek a bailout since the debtcrisis began almost three years ago. The rescue request followed weeks of escalating concern that badloans at Spain s banks might overwhelm public finances. TheSpanish crisis, coinciding with the prospect of Greece exiting theeuro after elections on June 17, roiled financial markets aroundthe world, sending the euro to an almost two-year low on June 1 andraising Spanish borrowing costs to near euro- era records. Mariano Rajoy, who took office in December and denied the need fora banking bailout as recently as May 28, will be under scrutiny ashis government tries to complete the cleanup after past effortsfell short. Doubts also remain whether the funds to shore up bankswill be enough to fix Spain s indebtedness, especially with theeconomy in recession and an unemployment rate higher than 24percent. We view this as a positive near-term development for Spain, andin particular for its banks, Andrew Benito, senior Europeaneconomist at Goldman Sachs Group Inc. in London, said in a noteyesterday. But it does not solve Spain s overall fiscal andmacroeconomic challenges, which remain substantial. Santander, BBVA Apart from Banco Santander SA (SAN) and Banco Bilbao VizcayaArgentaria SA, Spain s two biggest banks, and perhaps BancoSabadell SA, almost all Spanish lenders may be short of capital,said Daragh Quinn, an analyst at Nomura International in London. Santander and BBVA (BBVA) have been tarred by the nation s bankingwoes even though they generate most of their revenue outside thecountry. Santander declined 34 percent in Madrid trading in thepast 12 months, while BBVA fell 30 percent. They may benefit fromthe bailout if it cuts their funding costs and leads investors torecognize their relative strengths, said Quinn. Europe will lend the money to Spain s bank-rescue fund, which willchannel it to the banks based on the findings of reports by twoindependent auditors that are scheduled to complete a stress testof lenders by June 21, Economy Minister Luis de Guindos said at aJune 9 news conference in Madrid. Wonderful Opportunity Spain pushed for a funding cushion over and above what theindustry may need because the message it sends to the market ismuch clearer and more forceful, Rajoy told reporters in Madridyesterday. The IMF, in the June 8 report, said Spanish banks wouldneed at least 37 billion euros to withstand a weakening economy. While the rescue plan may provide a respite to Spanish debt and theeuro, whether it proves a success will depend on execution. What a wonderful opportunity Spain has to sort all this out, said Simon Maughan, a financial industry analyst at OlivetreeSecurities in London. But I m afraid they re going to squanderit. Only a commitment by Spain to buy bad assets from lenders andmanage them in a so-called bad bank will cure the ills of thecountry s banking system, Maughan said. Affecting Banks The money is there but the question is now how are you going touse it, Maughan said in a phone interview. If this moneyactually goes into the banks and allows for proper writedowns, thengreat -- but if just sits on their balance sheets, the uncertaintywill continue. De Guindos and Rajoy both said conditions on the loans from Europewould apply only to the banks that take the money and wouldn taffect the government s economic or fiscal policy. Spain isalready pruning state spending and raising taxes to tackle a budgetdeficit that is the euro-area s third-largest at 8.9 percent ofgross domestic product. Before the bailout announcement, Spain s bank-rescue fund, knownas FROB, had about 5 billion euros in cash. That compares with the19 billion euros in state support sought by the Bankia group,Spain s third-biggest lender, which was nationalized last month.The 100 billion euros from Europe helps remove doubts about fundingthe recapitalization of the banks that do need more money, saidNomura s Quinn. Needing Help The next questions are which lenders will require the funds and howmuch they ll need. Spanish authorities will weigh the findings ofthe IMF and the independent auditors, Oliver Wyman Ltd. and RolandBerger Strategy Consultants. The Bank of Spain, the country sbanking regulator, was accused in the IMF report of being too slowto tackle weaker lenders, a failure that allowed growingvulnerabilities to develop. They will want to remove the uncertainty, said Quinn. Thefact there is 100 billion euros means that there isn t the samefinancial limitation on enforcing the provisioning needs that maybe shown up in the audits. In addition to Madrid-based Bankia, nationalized lenders that needsupport include CatalunyaCaixa and Banco de Valencia, seized lastyear. The IMF s report said some former savings banks thathaven t taken government money, as well as medium and smallprivate sector banks, may post losses this year after provisioningfor bad loans. Analysts have been applying the level of provisioning planned byBankia across the industry to determine which other lenders may bevulnerable. Irish Solution? Banco Popular Espanol SA (POP) may need to set aside an additional3.8 billion euros to take loan-loss provisions to the levelsplanned by Bankia, according to Santiago Lopez, an analyst at ExaneBNP Paribas. Popular, which holds a shareholders meeting today,insists it doesn t need state aid. The Madrid-based lender said ina June 6 filing to regulators that it would earn a total of 905million euros in profit this year and next as it uses asset salesto fund provisions for bad loans. For Maughan of Olivetree, Spain s best chance of restoringconfidence in a banking system burdened by more than 180 billioneuros of toxic real estate assets would be to remove them from thelenders balance sheets. The Irish government, which sought abailout in 2010, funded a bad bank to take real estate offlenders books, forcing write-downs of 58 percent. The Irish forced the banks to take write-downs by saying we willtake your loans off your balance sheet for you and we will buy themat 35 cents on the euro, said Maughan. If you really want tostand up and be credible and say 100 billion euros is the rightnumber, use the money to take the bad loans off the banks. I am an expert from precisioninjectionmould.com, while we provides the quality product, such as IMD Mould , Metal Stamping Parts, Precision Injection Mould,and more.
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