Are we heading for a new Spanish banking rescue?

Gossip on an additional rescue for the banking industry in Spain is once again running high. Yet it might not prove as easy as most people tend to think. Under the financing arrangements up to €100 billion was indeed allocated in July last year by the European rescue fund. But under its terms it stemmed crystal clear this was to be regarded as a ceiling, the exact level deriving from an appraisal on real needs to be undertaken by an independent audit. Oliver Wyman performed that task and the final figure was downsized to €40 billion.

Even since, some argue Spain should have asked for more, taking into account the likely deterioration in balance sheets following the refinancing adjusted coverage currently under review and the increased volume of impaired assets the slump will sooner or later deliver. So be it, but the terms of the facility were meant to cover existing holes not potential ones. It is rather dubious that Spain could have asked for more money unless duly supported by findings by the external auditor’s conclusions.

As the EU has an impressive record in unwinding past agreements, it could easily agree to a further extension of the Spanish banking rescue. But is it wise to embark on such a salvage operation before ascertaining to what an extent you might need that fresh injection? The adjustment for refinancing operations is due to be finished by the end of September. Even if some bet on huge capital shortages, authorities insist that only a limited number of entities might face difficulties in bridging the gap. This scenario would hardly warrant begging for additional amounts to European partners.

A more serious threat might be expected under the European Central Bank demanding stress test to be conducted later on leading to massive new capital needs when conclusions are disclosed in the coming year. But this exercise will focus on all the banking industry across Europe, raising tricky questions on liabilities credit institutions are currently hiding. As the ECB will carefully avoid starting its supervisory task laden with such legacy costs, major overhauls are to be expected. The Spanish banks will not escape unscathed from this exercise, but others will certainly find themselves in a more exposed position.

Yet the open recognition by the Bank of Spain Governor that further funds under the rescue facility might need to be drawn before the close of the year casts a rather different picture. No one is better placed than him to know the scale of financing shortages lying in the pipeline. Even if the official line points to negligible new capital requirements, some observers point that up to 40 billion might be necessary to buttress the ailing banking industry.

As any preventive request for additional money would severely undermine confidence in the Spanish economic resilience, the obvious conclusion is that prospects might be markedly worse than officially acknowledged. Even so, advocating for extra money might lead to a self-defeating strategy. It would unsettle financial markets, fuel the current credit crunch and ruin any chance to ensure a swift recovery. It can only backfire severely hitting credit institutions and inflicting huge damage on the economy as a whole. It stands as a rather desperate option only to be envisaged when confronted with a formidable crisis. That’s why the Governor’s words might signal a severe deterioration in banking balance sheets Madrid has up to now adamantly denied.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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