Being these days in Barcelona I’m amazed how several publications, I’m thinking of Forbes and their “Spanish banks in top form” article, can be so blind and misleading. If Spanish banks are in top form, buckle up Dorothy, as the ride is going to be very rough all over the world, you ain’t seen nothing!
And the ride is going to be long and rough for Spain. How else could a developed country withstand more than 20% unemployment in a deflationary context, with a plunging internal demand. Sounds contradictory with Forbes’ article? Just keep reading.
- The real state bubble was worse than people predicted. And the worst was in Spain where we constructed, and have yet to sell, at least as many new houses than in the US alone with around six times more inhabitants, and around one third of the European Union with ten times more inhabitants… does that make sense?
- That had to be financed, obviously. Huge inflows of capital made sure of that. And the banks were the ones financing the developers to an amount roughly the size of half the GDP. Banks had been selling their interests in real state at the peak, getting rid of that business in the best moment. The capital markets bought them all.
- Once the developers failed, as they necessary had to, their assets and debts reverted to the banks. Now the banks are again on the business of real state in Spain, in fact leading it. The part of that business that was in the capital markets has obviously slumped (more than 80%), but of course that’s just one part of the financing they had. Those losses are mostly latent.
- In short that means that Spain may have bad debts roughly the size of 25% of its GDP. And that part is in the hands of the banks. But as they have been forced to absorb those, they are the first interested not to write off any of those debts, but to convert them to overpriced assets. In fact they bought the whole failed developments for the price of the mortgage. But that price was not right anymore. Which incentive do these banks have to lower the asset prices thus assuming losses and revealing the truth? None at all.
- Search for the balance sheets! The truth is still there, albeit hidden somehow. And they know, obviously. Why else would small Spanish banks be frantically merging with each other? There is a reason for that.
Spanish banks are simply hiding their losses. The real state market has not found its equilibrium yet. While they can, the main owners of the real state will try to contain the offer, placing things selectively in the market trying not to overwhelm the current tiny demand and betting for a better future where they will be able to reign on the real state business again.
In the meantime, Spanish banks are trying to con their customers with preferred shares. Issuing them and selling at nominal prices while re-buying those at the capital markets at real prices (half the price?). So, how is that for responsibility? What will their customers think of them in the future when they discover they actually have made an illiquid investment that they will not fully recover?
And yes, they have been more prudent in some aspects than their European counterparts. But that’s not enough. What would happen if they started marking loans to market? or assets to market? That would definitely be an eye opener, and a disaster.