Greece has been dominating the eurocrisis over the last few weeks, so now it is Spain’s turn. The European Commission approved a €37bn payment to Spain’s bank rescue entity FROB, which will give Bankia and three other basket case banks capital.
The banks have agreed to shed staff, branches and assets and reduce their business lines in the exchange for the money. They will fire about a quarter of their employees and shutter more than half their branches. Additionally, they will no longer make real estate loans focusing on retail, small and medium size business lending.
The bankers and politicians associated with this deal are making wildly optimistic forecasts of a return to profitability by next year. How this will be accomplished amidst an economic depression in Spain and a severely constrained business line remains to be seen.
This deal has two major consequences. The funds are being disbursed from the ESM to Spain’s FROB and then to the banks. This structure means that the bank rescue will raise Spain’s debt to GDP ratio by about four points. The other unavoidable consequence is the evaporation of thousands of well-paying jobs in country with an unemployment rate of 25.4%. This round of layoff alone will raise the rate to 25.7%.
There is a report from the Oliver Wyman consulting group that claims Spain will only require €59.7bn to shore up its banks. The mainstream media repeats this number with no critical analysis. It is a virtual certainty that Spain will need over €300bn based on the amount of real estate loans in the system.
Does anyone remember the subprime crisis? The numbers were small at first, but within 18 months all the major U.S. banks were essentially nationalized by the federal government. Here is how Citibank’s descent to insolvency unfolded:
- 10/2/2007: $5.9bn in mortgage write-downs announced. The New York Times reported, “Investors took the disclosures as a sign that the worst may be over for the banks and that any losses may be contained.”
- 7/8/2008: $12bn more in write downs announced
- 10/16/2008: $13.2 more in write downs announced
- 11/24/2008: Citigroup is rescued by the federal government with a $20bn capital injection and a loss shield on an additional $300bn in bad assets.
- Total Write Downs: $39.1bn
Once a banking crisis starts, losses become progressively worse and continue past everyone’s worst case scenarios. This chart from ZeroHedge illustrates the Spanish banking crisis:
The gross amount of bad loans is €182.2bn out of about €1.7trn in total loans. Bad loans have doubled in the last year, and a conservative estimate has them doubling again in the next six months and rise even more from that point with the history of the American subprime crisis repeating itself. When all is said and done, Spain will need over €300bn to clean up its banking sector. At least Bankia will return to profitability next year.