Beneath the gilt of a rising IBEX 35 and decreasing yields for Spanish sovereign debts lies the consequences of a burst property bubble and its resultant banking crisis. Spain may be able to cover its failing banks with sheets of ECB money. although hidden from view for now, the crisis continues.
Spain failed to sell Catalunya Banc to other institutions despite giving it €9.08bn in taxpayer money and purchasing its bad loans from its balance sheet to be deposited into Sareb. Banking insiders refused to purchase the bank, because they know CB’s true financial position is worse than indicated on paper. Just like the rest of the sector, CB is not winning new business and its loan portfolio continues to disintegrate.
The Wall Street Journal claims that Spain has made progress in cleaning up its banking sector. I would more accurately define it as “paper progress.” On paper, Spain has seemingly done a lot, but these moves have done little to resolve the real problems at the heart of the crisis.
Spain has borrowed money from the ESM to fund its bank bailout plan with the cash spent on increasing bank capital ratios, purchasing bad loans to move to Sareb and merging several failing institutions into one large, weak one.
For all of these paper maneuvers, the rot exists under the shiny veneer of government action. Unemployment remains high, and property values continue to plummet. These two factors ensure that potential borrowers remain few and far between with loans originated to the private sector dropping at an alarming rate:
Bank do less business but manage to report profits. This is because they are participating in the Sarkozy trade. Banks borrow money from the ECB to purchase Spanish debt that is guaranteed by the Draghi put. Banks remain profitable today, but at the cost of strengthening the perilous link between the banking sector and sovereign debt.
As such, Spanish banks have become hedge funds composed of decaying private loans offset by appreciating Spanish sovereign debt holdings. As long as this dynamic exists, the banks’ health will appear to improve, but nothing will actually change. The lack of buyers for a supposedly rehabilitated bank reveals the true condition of the sector.