The Bank of Spain didn't exactly bare all this week, but its report on Spain's cajas was the best peek we've had yet inside these troubled savings banks. The cajas account for 42% of the country's total banking assets, but so far trying to divine the scale of their losses has been mostly guesswork.
The central bank's headline disclosure was that the cajas were exposed to about €100 billion in "potentially impaired loans" in real estate and construction as of December. That's equal to about 10% of Spanish GDP. That exposure also equals about 46% of the cajas' total real-estate and construction exposure of €217 billion. Of that €217 billion, some €173 billion was tied to lending, with €44 billion in foreclosed assets or property received in payment of debt.
The Bank had previously told us that the entire banking system's problematic real-estate assets came to about €180 billion, but this week's report marks the first break-out of the cajas' situation, which has for months been fueling dramatic worst-case scenarios and spiraling borrowing costs for Europe's fourth largest economy.
That the cajas had been battered in the credit crunch and housing bust was no secret: the savings banks, usually owned by local governments, have spent the last year being hustled through mergers that shrank their number to 17 from 45 last year. Now several of them are preparing public listings and feeling out private investors to raise enough capital to meet Madrid's new requirements, or else face partial nationalization by the end of the year. To pass muster, the central bank estimates that Spain's banks will need about €20 billion that they don't currently have, though others estimate that they may need €40 billion or more.
That may all sound grim, but it's a good sign that Spain is starting to come clean about the scale of the losses at the banks. Last February, Spanish Prime Minister José Luis Rodríguez Zapatero told the Atlantic Council that the Spanish financial system was "strong and solid," and that the country's banks "have proven to be resilient." In the year since Mr. Zapatero uttered those words, the premium that investors have demanded on Spanish 10-year government bonds has climbed roughly 30%.
That's not to say that these latest disclosures and reforms have led Spain out of the woods. For one thing, the official loss rates seem based on assumptions that may prove too rosy. The government sees economic growth at 1.3% this year, but most private-sector analysts expect it to come in somewhere between 0.7% and 1%. And if Spanish property prices—now down about 19% from January 2008—fall more sharply than the Bank assumes, that €100 billion "potentially impaired" estimate could still grow.
This week's revelations weren't pretty. But they're better than leaving investors to guess at the extent of the cajas' problems. The lesson from last summer's less-than-rigorous stress tests in Europe was that ignoring problems at the banks won't make them go away. Ireland—whose two biggest banks passed the first stress tests just months before being nationalized—learned this the hard way. Spain doesn't have to, and anyway, the euro zone can't afford for Spain to become another Ireland. This week's disclosures won't solve the problems in the cajas' portfolios, but they're a start.
Source: Wall Street Journal