Spain’s Banks are Worse Than Official Numbers Suggest

UPDATE 1-Spanish banks’ bad loans hit new high in September | Reuters.

Spanish Bank Bad-Loans Ratio Rises to Record 10.71% in September – Businessweek.

Spanish Bad Loans Hit Fresh Record High Again | ZeroHedge.

Spain: Liar, Liar, Pants On Fire – Forbes.

Spain is becoming jealous that Greece has been getting all of the media attention lately, so it strikes back today with news that its banks set another record in the bad loan department.

Spanish banks reported 10.71% of their €1.7tr loans are nonperforming. Reuters states:

The new figures won’t affect the euro zone aid, aimed at cleaning up the toxic real estate assets from the lenders’ balance sheets, but reflect moves by the banks to be more realistic about the extent of their bad loans.

The implication of banks being “more realistic” regarding bad loans is that they are still not being honest enough. Spain’s banks are insolvent and being kept alive by huge amounts of credit from the ECB.

As usual, the situation is being sugar-coated by bureaucrats, politicians and bankers. Here are the numbers.

The Spanish banks own €95bn in Portuguese, Greek and Irish debt, and you can kiss the all but the Irish debt goodbye for now. This number is dwarfed by the bank’s real estate loans and residential mortgages.

They currently have €385bn in real estate loans, and a property bubble just burst. In addition to these loans, they also have €630bn in residential mortgage loans on their books. As the economy worsens and property values drop,  more real estate loans and mortgages will go bad.

If we know anything about a banking crisis, it is that we do not learn how bad it is until the banks fail and the regulators step in to assess the damage.

For a back of the envelope calculation, let’s say that the Spanish bad loan number reaches 25%, which is reasonable considering conservative economic forecasts telling us that Spain’s economy will continue to shrink into 2014. One-quarter of €1.7tr is €425bn.

This number wipes out the rest of the vaunted ESM, and we have not even bailed out the Spain’s government. Frankly, I believe that the northern tier will come to its senses by then and cut the periphery off.

The lies of the bureaucrats, politicians and bankers will be uncovered sooner or later. In the meantime taxpayer money courtesy of the ECB will keep the whole thing from running off the rails, but no one knows for how long.

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