MADRID—As neighboring Portugal seems to move inexorably toward requesting a bailout, Spanish Prime Minister José Luis Rodríguez Zapatero pledged to accelerate the cleanup of his country's opaque network of savings banks known as cajas.
This means the cajas for the first time will disclose the extent of their exposure to troubled real-estate and construction loans, a move that could trigger injections of government funds into some of the banks.
The cleanup effort is part of Spain's attempt to convince investors it isn't another Portugal or Ireland.
The disclosures will include collateral on loans, loan-to-value ratios, repayment histories and provisioning levels. The cajas must also reveal detailed information on their financing needs. Listed banks that don't already publish this type of data will be required to do so by the end of March. This will be the first step in determining if the banks need more capital.
Spain has injected around €11 billion ($14.25 billion) into its banking sector, equal to around 1% of gross domestic product and much less than in most other developed countries during the crisis. But investors believe losses are being hidden, especially at the unlisted cajas, which control half of the country's lending business but have complex ownership structures and disclose less financial data than their listed peers.
Many draw parallels to the situation in Ireland, which is also grappling with the collapse of a housing boom and where the rapid deterioration in the finances at some big banks last year forced the government to step in and recapitalize them, blowing out its budget deficit to 32% of gross domestic product. That paved the way for a €67.5 billion bailout from the European Union and the International Monetary Fund.
Concerns that Spain could face a similar fate have sent the country's borrowing costs to levels not seen since before the country adopted the euro in 1999. "I understand there are doubts," Mr. Zapatero said at a presentation to business leaders and journalists. "As a result, we have an urgent objective, which is for banks to improve as soon as possible their capital structures." He added that the state's Fund for the Orderly Restructuring of the Banking Sector, or FROB, is ready to help with the process.
Spanish authorities have sought to limit the cost of the banking-sector cleanup by forcing ailing institutions into mergers with stronger ones. The number of institutions in the bloated cajas sector has been cut to 17 from 45, with the FROB providing funds to cover capital shortfalls. Furthermore, the government overhauled regulations to allow the cajas—controlled by employees, depositors and local governments—to become joint-stock companies and list on the stock market.
Following the banking stress tests conducted across Europe in July, the Bank of Spain said four of the new institutions needed to bolster their solvency ratios. Three are asking the FROB for a total of €2.15 billion, while a fourth has said it has sold some assets and won't need to be recapitalized further.
Beyond this, the Bank of Spain estimates that the country's financial institutions are holding €180 billion of real-estate assets that could eventually sour, including delinquent loans and repossessed properties. But it says they have on hand loan-loss reserves to cover about one-third of that amount and could cover much of the rest with earnings generated over the next few years. Bank of Spain Governor Miguel Ángel Fernández Ordóñez recently said he doesn't believe Spanish banks will need more state funds in 2011 and that he hopes banks will be able to raise funds from markets if they need to.
Most private-sector analysts believe this month's disclosure exercise will show Spanish banks need more capital, though not a lot more. One closely watched set of disclosures will be from the new entity formed by two of Spain's largest savings banks, Caja Madrid and Bancaja, as well as some smaller lenders. The new bank, Spain's third-largest by assets and with a market share of more than 10%, is considered the bellwether for the sector's health and whether efforts to attract investors will work. This is due to its size, but also to worries about Bancaja's potential exposure to real-estate assets along the Mediterranean coast.
UBS AG estimates that Spanish savings banks will need up to €20 billion in state funds to bolster their capital ratios to levels that will allow them to access international capital markets. In this scenario the banks would be allowed to cover losses on bad loans with earnings generated over time. However, if Spanish authorities want to write off the bad assets immediately and raise the banks' solvency ratios to levels that will really inspire investor confidence, UBS calculates that could cost up to €120 billion, or 12% of GDP.
In theory, even this larger amount should be manageable for Spain, which has one of the euro zone's lower public-sector debt levels, though market volatility would make the issuance of such a large amount of debt problematic. The European Commission estimates Spain had a debt-to-GDP ratio of 64.4% in 2010, nearly 20 percentage points below the euro-zone average.
"The situation of the banks is not that dramatic," said Roberto Ruiz, a UBS strategist in Madrid.
Source: Wall Street Journal