Photo: Charly Morlock
Spain’s Ministry of Economy and Competitiveness released a detailed presentation (pdf) today on the country’s planned economic reforms.Their slides not only demonstrate the deep problems in the financial sector—they also paint a portrait of how laughable the government’s current attempts will be to fix it.
The three-year long-term refinancing operations undertaken by the European Central Bank in December and February do little to actually cleanse the balance sheets of troubled European banks. While the immediate consequence produced a net positive for commercial banks, the result is that the focus has been entirely shifted off of sovereign borrowing and squarely placed on the financial sector.
Back in November, investors were up in arms about the rising borrowing costs for the governments of Spain and Italy. The ECB decided that this pressure was too high, the resultant liquidity operations merely used the banking sector as a tool to prop up sovereign borrowing.
While we’ve seen a slight reversal in this trend of lower yields in Spain and Italy of late, these countries are probably funded through at least next year by now, so sovereign borrowing there has become a far less important issue in the near-term.
But for the banking sector, these LTROs were merely a quick fix. Banks are still reliant on the markets for funding to get themselves through this year (not to mention 2013), and austerity in peripheral Europe is exacerbating economic contractions.
That’s why all the pressure is suddenly on Spain. Its economy is in shambles—22.9 per cent of the Spanish workforce is unemployed and its banking sector is struggling to stay afloat as more and more Spaniards default on loans.
Add that to some €78.81 billion ($103.71 billion) in banking sector exposure to Portugal—the country in Europe most likely to be forced to restructure its debt right now—and it’s hard to believe that the Spanish financial industry will be able to stay afloat without some significant help.
This brings us to the presentation released by the government today.
To date, the Spanish banking sector has addressed concerns about the health of the banking sector by coercing bank mergers. But uncertainty about how much these companies' losses will be on real estate assets makes accessing market financing difficult and expensive.
We find it difficult to see how write-downs and even more consolidation are going to substantially bolster confidence here.
Upping capital requirements means banks will have even less cash to lend out into the economy, deepening the recession and compelling a vicious cycle of loan delinquencies.
...but we find their estimates troubling given that we doubt a sudden turnaround to 2.3% GDP growth in 2013 after a drop of -1.7% this year.
A strong stimulus program might offset bank deleveraging. The current program could serve as a catalyst, but it's missing the active ingredients to make growth happen.
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