“It is a truth universally acknowledged that a country formerly in possession of a housing bubble must be in want of a substantial equity recapitalisation of its banking sector”
As Dan Davies has noted, the bailout antics of the last few years have “always been about Spain”. Greece, Ireland, Portugal, Cyprus and Slovenia seem small and/or ringfenced enough
to really damage the core banks. Italy has deep and intractable problems, but more or less the same deep and intractable problems they had when they joined the Euro and they have the considerable cushion of a relatively modest total (private plus public) debt burden. This leaves Spain as the more obvious possible trigger. In particular, Germans develop a visible twitch at the prospect of filling in the “black holes” in Spanish banks’ books. Cyprus was pushed over specifically to spell out to peripheral politicians that bailout funds were geschlossen to their banks.
Let’s just look at Spain against a couple of other countries who managed to run stupid property bubbles:
|Domestic Non-FinancialPrivate Credit:GDP||House Price rise 1997-peak||House Price Drop from peak||Credit growth 97-peak||Bank Bailout Bill (% of GDP)|
Sources: BIS, Dallas Fed, IMF Financial Stability Report
Note: non-financial credit= credit to end-users, netting out intrabank lending.
Not all lending property, let alone residential, obviously.
Looking at this table and two questions spring to mind – how has Spain turned an irish-style slump in its property market into a merely UK-sized banking problem? And, what in God’s name did the Irish bankers get up to? Spain’s house price crash looks a lot like Ireland’s, its banks lent out two-thirds of as much (relative to GDP) yet its bailout bill is a tenth of that of Ireland. Is this convincing?
The instinctive response – certainly shared by many in the US – is that the bill to date is just an appetiser, that Spain is hiding the slump and a bill is just waiting to land. But these claims seem to be pretty hazy as to where, exactly, in the system the extra bad loans are going to show up.
First up, the world has spent a decent part of the last five years stress-testing the Spanish banking system. This is not 2007-08 when the Irish could strong-arm a critical analyst into silence. Although the Banco de Espana has done itself no favours by hiring Oliver Wyman Who Thought Anglo Irish Was The Best Bank in The World to do their official Stress Test, recent private attempts to do the same have not produced markedly different outcomes. Spanish outcomes so far are well within the adverse scenario suggested by Oliver Wyman Who Said AngloIrish Was The Best Bank In The World. Who knows, the arsonist-to-loss-adjuster trope may not be the disaster it first appeared. Rather than Oliver Wyman Who Said Anglo Irish Was The Best Bank In The World being systematically and grossly optimistic about how easy it is to run a bank, they got carried away with the spirit of the times. Now that the zeitgeist implies being sceptical, they may do rather better. Certainly they have published a detailed 95-page stress test, which is approximately 95 pages more detail than I’ve seen from any of the generic doomsters. In particular, NPLs appear to have stalled (ht @ibexsalad).
A hopeful sign of late has been a (very) few large transactions going through the Spanish market. While not remotely enough to absorb a potential firesale, these transactions do give us an idea of clearing prices. Goldman Sachs recently assessed the banks’ capital needs on the basis of these prices and found no gaping capital hole (though it did expect 5 out of the 6 banks it looked at to require extra capital totalling up to €9bn. Again a long, detailed report).
The point here is not an investment view: Spanish bank equity may be a lousy deal, it may be a great one. The point is rather that if there is another bailout to come, it is unlikely to be make the total much larger relative to Spanish GDP. Limited comfort from the point of view of say an Andalucian jobseeker, but an existential threat to the euro is looking a lot less scary than pessimists (like me) have admitted.
Obligatory handwringing: Spain’s macro indicators continue to look pretty bad. It has Anglo-Saxon private debt levels, and increasingly continental public sector ones. Its international position is one of massive net external debt, and domestic demand remains dead in a ditch. The economy does appear to have bottomed and the external flow position has moved to balance even as the UK sets new record deficits. But it’s not good enough to assume a massive capital deficit without suggesting where exactly this has occurred. Spain continues to underperform fiscally, but generally rather better than the UK. To say that the banks won’t need massive future help is of more interest to their currency-mates – what’s already in the price is bad enough, as non-performing loans continue to grow.
It’s a pretty strong signal that there’s more to life than macro. The parallels between Spain and Ireland in macro terms are pretty exact, but Spain’s bankers appear to have escaped the very worst of the sheer, jaw-dropping imbecility of their Irish counterparts. For my money, Anglo Republic is actually one of the very best books about the whole global crisis because it’s a wonderful and highly entertaining (the bank spent €200,000 on corporate golfballs) take on just how a little success can drive people, but especially bankers, insane with greed and hubris. Clearly the Cajas especially were awful banks, but Spanish losses are not in the Irish stratosphere. Not all bubbles are created equal – and the EU can give thanks that its largest troubled economy appears to be its Korea rather than its Indonesia.
The UK might also usefully reflect on how the main difference between the UK and Ireland was that sterling prevented an Irish-style property meltdown. Plenty of evidence that the Scottish banks were as rotten as their Irish counterparts.
Note because a lot of people on the internet struggle with sarcasm: ‘Genius’ is basically clickbait. I don’t really think ‘better than Sean Fitzpatrick’ is evidence of genius.
Here’s a couple of gratuitous Anglo quotes:
Banking and golf went hand in hand at Anglo. In 2001 FitzPatrick was asked by the Sunday Business Post about his favoured sources of personal finance information. ‘For information, one of the best sources is FT.com,’ he said. ‘For analysis, read The Economist. But for the real McCoy, you can’t beat the nineteenth hole on the golf course.’
Carswell, Simon (2011-09-05). Anglo Republic: Inside the bank that broke Ireland (p. 86). Penguin UK. Kindle Edition.
Incredibly, during a two-year period when the size of Anglo’s loan book more than doubled, there was no one on the board of the bank overseeing risk.
Carswell, Simon (2011-09-05). Anglo Republic: Inside the bank that broke Ireland (p. 93). Penguin UK. Kindle Edition.
(if you’re Anglophone and interested in Spain, you should probably check Charles Butler’s excellent blog, even if most of what he does with me is roll his eyes at my taking Spanish employment stats seriously. )