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Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Spain related comment. He also maintains a collection of constantly updated Spain charts with short updates on a Storify dedicated page Spain's Economic Recovery - Glass Half Full or Glass Half Empty?

Monday, February 16, 2009

Santander's Banif Fund Suspends Payments

"I would now expect several eurozone countries with weak banking sectors to get into serious difficulties as the crisis continues. There is a risk of cascading sovereign defaults. If this was limited to countries of the size of Ireland or Greece, one could solve this problem through a bail-out. But solvency risk is not a problem confined to small countries. The banking sectors in Italy, Spain and Germany are increasingly vulnerable."
Wolfgang Munchau, Financial Times, 15 February 2009.
German Finance Minister Peer Steinbrueck said on Monday euro zone countries would have to pull together if one of them faced a "serious situation," adding that Ireland was in a "difficult situation."
Investors are increasingly concerned that Ireland may default on its national debt as the government pledges more money to help troubled banks, the Sunday Times said. Credit-default swaps on Ireland’s government bonds reached record levels last week as debt investors rate the nation as Europe’s most-troubled economy, the paper said. Ireland has pledged financial help for lenders that would be more than double its annual economic output and the loans held by its banks are more than 11 times the size of its economy, the report said. Credit-default swaps on the five-year sovereign debt of Ireland, which is rated AAA by Fitch Ratings, jumped 49 basis points on Feb. 13 to a record 377, according to CMA Datavision prices. That’s 18 basis points more than the cost to protect the debt of Costa Rica, which Fitch rates BB, or 11 grades lower than AAA, from default.
Bloomberg, 16 February 2009


Well push is, I think, now getting much much nearer to shove time, and we now wait restlessly to know what EU leaders are going to offer in the way of a second round of bank bailouts at the end of this month. As I argue in this post, and as Munchau also suggests, more than sweet words will be needed to honour the commitment made on October 12 2008 in Paris that no "systemic" EU bank would be allowed to fail, as a minimum we need a comprehensive mechanism financed by the issuing of EU bonds.

The most recent and most obvious example of the push coming to shove situation is the announcement by Spain's Banco Santander, yesterday (Monday), that its Banif property fund, the largest of its type in Spain, could not meet the avalanche of redemption requests it had been receiving, and consequently had asked the stock market regulator for permission to suspend payments for up to 2 years.

According to the bank's own statement clients (of whom there are a total of around 50,000) holding 80 percent of the investments, or 2.62 billion euros, had asked to redeem their holdings while what is the eurzone's biggest bank had had to admit that the Banif Inmobiliario Fund FII lacked the cash to facilitate this, and that they, Banco Santander were not going to inject the liquidity necessary to enable the fund so to do.

This decision stands in sharp contrast with the earlier action of Spain's second-biggest bank BBVA who, when faced with a similarly massive demand from clients to redeem their investments at the end of last year, opted to buy 95.6 percent of their 1.57 billion euro fund, which is the second biggest in the Spanish market.

Banif has 67 percent of its assets invested in housing, 18 percent in offices, and 14 percent in commercial property, according to the fund's fourth quarter report. These properties are distribuited around Spain, with heavy concentrations in Madrid, the Balearic Islands and the north-west. Offices and commercial premises are mainly centred in Madrid and Barcelona. The fund's assets lost around 15 per cent of their value between the third and fourth quarters as values were adjusted to reflect price declines. Property sales are in constant decline in Spain - according to figures released yesterday, total sales December home sales were 26 per cent down over December 2007. House prices in Spain fell January on January by around 10% and may fall by a further 20 percent this year according to a report last week fromTasaciones Inmobiliarias SA (TINSA), the country’s biggest property valuer.

Banif, which is described in its prospectus as “low risk,” produced a yield of 1.37 percent last year, down from 5.87 percent in 2007, according to the fourth-quarter report, while assets under management fell 4.2 percent in January, according to data published by Inverco, the Spanish asset management association.

Analysts are evidently alarmed by this development and are warning of the immediate danger that this news could spark a a massive demand for redemption from investors in other Spanish real estate funds. There are currently nine such funds in Spain, with assets totalling around 7.25 billion euros under their management.

"I've never seen a case like it," said one fund manager at Madrid brokerage Renta 4, who asked not to be named. "It could trigger a snow ball effect; that's one of the consequences when you start to hear that the biggest (fund) is doing badly".

Santander's property division propose to use 10 percent of the fund's assets - valued at 3.41 billion euros at end-December - to pay investors partial redemptions, saying that if the necessary capital could not be raised through asset sales, it would inject cash itself. The statement also said that should the fund not be in a position to fulfil repayment requests within two years it would wind itself up. Clearly this news was not exactly enthusiastically greeted by the Spanish Bolsa, and Santander stock closed 4 percent lower at 5.49 euros after a sharper sell off in the last 30 minutes of trade. This compares with a 3 percent fall in the DJ European banking index.

“What’s happened is another symptom of deep structural problems facing the Spanish real estate industry, which will take years to resolve,” said Juan Jose Figares, chief analyst at Link Securities in Madrid.



Bad Debts Rising At Santander

Spanish banks, including savings banks and co-operatives, saw bad loans rise by 5.2 percent in December to 59.16 billion euros ($75.49 billion) from 56.12 billion euros in November, Bank of Spain data showed yesterday. The non-performing loans (NPL) ratio for all institutions was 3.3 percent at end-December, compared with 3.13 percent in November, with rates among savings banks the highest, at 3.79 percent, up from 3.63 percent the previous month. The bad debt ratio for commercial banks rose to 2.81 percent from 2.61 percent.

In the case of Santander such loans more than doubled to 14.2 billion euros in 2008 as a recessions in Spain and in the U.K. lead to rising defaults by borrowers. Loan arrears as a percentage of total lending totaled 2.04 percent at the end of December, up from 0.95 percent a year earlier and 1.63 percent in September. The bank added 3.6 billion euros in bad loans in the fourth quarter. The bank stated during the presentation of its full year results that NPLs in the Spanish banking system could rise up to 8 percent in 2009 as the country heads in to its worst recession in 50 years.

Full-year profit fell 2 percent to 8.88 billion euros as the bank booked 350 million euros in costs tied to compensating customers hit by the alleged Madoff fraud.

“The U.K. is a terrible place for a bank to be and Spain is also looking more and more dreadful,” said Lecubarri, who manages about $250 million, in a telephone interview ahead of results. “What’s key for investors is judging how this will keep affecting asset quality.”

Santander has said it will pay 1.38 billion euros to clients hit by losses from investments with Madoff, making it the first bank to offer a settlement in the affair. The bank’s Optimal Investment Services hedge fund unit, based in Geneva, had 2.3 billion euros with Madoff.

Metrovacesa To Be Handed Over To Creditors

Metrovacesa, which is Spain's biggest property firm, will be handed over to its creditors on February 20, slightly later than its main shareholder originally planned, in return for the banks cancelling debt. The Sanahuja family, which has an 81 percent stake in Metrovacesa, have said in a stock market announcement said it will hand over 54.75 percent of the office, mall and housing developer to six creditor banks next Tuesday.

"The arrival of some documentation has been delayed and the entry of the banks is delayed until next Tuesday. The company will also publish (full year) results) on Tuesday," a spokesman for the family said.

The Sanahuja family accumulated between 4 and 5 billion euros in debt through their acquisitions, but got into difficulties when the market turned and banks restricted further lending. As a result of the "handover" BBVA, Santander, Sabadell, Banco Popular, Banesto and Caja Madrid will each take 9 percent of the company. The Spanish banks are thus constantly expanding their property portfolio as the non performing loans pile up.


And The Credit Crunch Continues

German Chancellor Angela Merkel and French President Nicolas Sarkozy called on European Union states on Monday to focus efforts on ensuring credit lines were restored to the battered European economy. "The restoration of the supply of credit must be our top priority," they wrote in a letter to the Czech EU Presidency, a copy of which was obtained by Reuters. "We must renew our commitment to a return to sustainable public finances," they added in the letter, which also called for a special summit on the economic crisis later in February.

According to the latest report from Markit economics Spanish manufacturers are being hit the hardest by credit squeeze as the financial crisis deepens and factories swoon into closure. Markit found that more than one in five manufacturing companies in Spain feel the deterioration in credit conditions is hurting their business, while 46 percent reported that credit availability had worsened from three months earlier.

In an attempt to address the problem and provide credit direct to the customer, the Spanish government have now approved a 4.17 billion-euro plan to aid the car industry. The plan involves an injection of 800 million euros this year to improve productivity and 1.2 billion euros which will be made available for consumers to finance new-car purchases. The plan also includes loans for companies and permits manufacturers to delay paying social security taxes. The At the start of the recession the Spanish car industry represented around 6 percent of Spain’s economy and employed more than 350,000 people. Spanish January car sales were down 42 percent from a year earlier, according to the trade group ANFAC.

Action At The EU Level Urgently Needed

I will close this post as I opened it, with a quote from Wolfgang Munchau. Wolfgang suggests that the action which is needed is not going to happen. It could well be he is right, although I personally at this point have not abandoned all hope. But we should be in no doubt, the price of inaction at this point will be high, as high as that which Wolfgang suggests. The EU banking system is in danger, and it is danger not just in Southern European "PIG-like" economies. It is in danger in Germany, it is in danger in the UK. We need a collective response, and we need it now!

The right course would be to solve the underlying problem – to shift at least some of the stimulus spending to EU or eurozone level and, ideally, drop those toxic national schemes altogether and to adopt a joint strategy for the financial sector, at least for the 45 cross-border European banks. But this is not going to happen. It did not happen in October, and it is not going to happen now. As a result of the extraordinary narrow-mindedness of Europe’s political leadership, expect serious damage to the single market in general and the single market for financial services in particular. As for the eurozone, I always argued in the past that a break-up is in effect impossible. I am no longer so sure.




Update

Reuters have a very useful piece of background which gives us a bit of insight into current thinking. Comparisons are being made with what happened after Spain's last recesssion, since banks bougtht up large chunks of the of the property industry during the 1993-95 recession before making up to seven times their original investment by selling them on in the 1997-2007 property bubble. However there are serious question marks over whether a model like this will work this time round, since property prices may simply take a substantial fall, and then prices may well stay low, as happened in Japan after 1992. Certainly current conditions look nothing like Spain in 1994, and the banks' current haste to buy property, rather than allow failing businesses to go bust, is artificially lowering NPL rates now, only to delay future loan losses, losses that will hit sooner or later (my guess is 2011) as it finally sinks in that this is not a normal recession and that there will not be a normal recovery. Santander, for example, bought 2.6 billion euros of property last year at 10 percent under the (official) market rate. The bank argues that had it not swapped that debt for property, loans on 13 percent of those assets would have defaulted.

Spanish banks are returning to property ownership to avoid loading more bad loans on to their balance sheets but the strategy is risky and unlikely to be as profitable as their real estate buying spree 15 years ago. Spain's eight biggest banks last year formed or resurrected property wings that have bought up 7.8 billion euros ($9.9 billion) worth of property from struggling home-owners and developers.

The main threat to Spanish banks has come not from the toxic U.S. mortgage debt that has poisoned U.S. and British institutions, but a rapidly deepening recession propelling their bad loan rate to an expected 7 percent this year and 9 percent in 2010 from 2.8 percent last October, according to the Bank of Spain. Mindful of the need to keep bad loans to a minimum, bankers are doing everything to stop another major developer filing for administration as Spain's biggest house builder Martinsa Fadesa

Not only will creditors likely take years to recover debts from Martinsa but the default also ramped up non-performing loan (NPL) rates as they provisioned 25 percent of the loan, or 250 million euros in the case of No.2 savings bank Caja Madrid. "By buying real estate assets the banks stop loans becoming bad loans. In so doing, the client's debt with the bank is canceled and they avoid not only increasing bad loans, but they also avoid having to make more provisions," said Nuria Alvarez, an analyst at Madrid brokerage Renta 4.

10 comments:

Anonymous said...

eduardo, da gusto leerte para levantar el ánimo.

Hynek Filip said...

So basically it is all about virtual cash vanishing into thin air and alleged "liquid" investments (Banif shares) becoming as illiquid as can be.

Has it not been manifestly foolish to think that such investments are truly liquid, given the nature of the funds investments (real estate)? Oh it was, but everÿbody believed that real estate knows only the way up. Which, in fact, is exactly the same as believing in Bernie Madoff.

So with all due respect to the argument that we need to put out the fire with whatever we have, is it not so that an economy based on such foolishness and make-believe simply can not be saved, but instead must be radically reformed?

If you issue gazillions of EU bonds without thinking about how to reform the economy and eliminate such blatant errors, you will most likely end up with the need to issue more gazillions of EU bonds just some three months later.

Anybody following the Zimbabwe story? It is all there.

Edward Hugh said...

"is it not so that an economy based on such foolishness and make-believe simply can not be saved, but instead must be radically reformed?"

Well, with all respect Hynek, I am publicly committed to reform (remember the post about Miguel Fernandez Ordoñez, etc, etc), and to the downsizing by 50% of the construction and property companies, and of a 20% general reduction in prices and wages, and of a state of seige building on emergency export industries (possibly with the necessary waivers from Brussels on regulations given the urgent problem)...

but do we really have to go all the way down to absolute zero first? I am against all types of fundamentalism, both of communist totalitarianism and of the free markets do everything mirror image.

I am not in favour of a 50% downsizing of all Spanish bank deposits, which is what we'll get if we are forced out of the eurozone, which is what we'll get if someone doesn't do something to stop it, and sharpish....

"Anybody following the Zimbabwe story? It is all there."

The big difference is Zimbabwe median age 20.1, Spain median age 40. There is no comparison. But then, you are working on a different theoretical model than me, that is why we are getting such different results. Basically, unless spain is rocketed out of the eurozone there is no way the country's leaders can credibly commit to inflation, no way at all. That past is all behind us. Look at Japan.


And, of course, the biggest problem that is on the point of hitting and about to make all this very complicated is coming from the East.

And also remember that I am not simply selfishly talking about protecting the UK, Ireland, Austria, Sweden, Germany and the South of Europe, I am also in favour of immediate admission and protection for all the eastern economies who want to enter the eurozone.

United we stand, divided we go down the plughole, one by one.

Incidentally, which reforms should we be copying? Can you give me an example of a role model country at this moment? Or is it that we have all been bad boys, and need to reform? This sounds rather utopian to me.

Bloomberg Today:

Moody’s Investors Service said some of Europe’s largest banks may be downgraded because of loans to eastern Europe, sending UniCredit SpA to its lowest in 12 years. Moody’s sees “continuous downward rating pressure” in the region as a result of worsening asset quality and western banks’ reliance on short-term funding, the ratings company said in a report published today. UniCredit earned almost half its pretax profit from eastern Europe, Raiffeisen International Bank-Holding AG almost 80 percent in 2007 and Erste Group Bank AG of Austria more than 60 percent, Moody’s said. The MSCI East Europe Financials Index dropped 9.9 percent to the lowest in almost six years after the Moody’s statement today. The International Monetary Fund has offered aid worth about $52 billion to Latvia, Hungary, Serbia and Ukraine. It may extend bailouts to Bulgaria, Romania, Lithuania and Estonia, according to Capital Economics research.

José Luis said...

I agree with Hynek Filip in saying NO to european bonds. As Willem Buiter has explained in the FT, what EU countries need is market discipline. I´m spanish, and I think it was good for Spain that S&P donwngraded spanish debt, because there is only one way politicians will try the extraordinary measures we need: market discipline. Zapatero will boast public indebtness untill the markets says no.
If you issue european bonds, the play can go on, and the final recession will be worst.
We don´t need euro bonds. What we need is a competitive disinflation: cutting wages and prices, as you Edward are pointing.

Edward Hugh said...

Hi José Luis,

"I agree with Hynek Filip in saying NO to european bonds."

Well look, I don't think EU Bonds and wage and price deflation are two alternatives, we need both. The point is that with the deflation the defaults will skyrocket. Remember we are probably talking about 7 million plus unemployed in two years time, many of them with any form of financial support as the INEM money runs out.

And as the defaults rocket, and the NPLs lock in, Spain's banking system will simply melt.

So then these 100,000 euro guarantees will be worthless, and people will lose their deposits. That is what worries me most.

So Spain needs to retain some sort of working bank system. But, as I keep saying here, Spain may not be the worst case scenario, Germany or the UK may be. Remember Spain is going to default on external finance, much of it owed to Germany. And the meltdown in the East is sending german industry through the floor.

I have both Spain & Germany pencilled in for a 5% GDP contraction this year, and it will be neck and neck to see who is in a worse state. Events are overtaking ideas fast.

"If you issue european bonds, the play can go on, and the final recession will be worst."

No. I think there is no way the play can go on. This is finished, whatever happens. We are in a depression of global dimensions. This is going to last some years. Spain's political class losing control of decision taking about Spain's economy is a quid pro quo for the EU bonds. It is like an IMF bailout from Brussels, which to me personally makes much more sense than going to Washington.

Of course, if it is the case that at the end of the day the EU just isn't up to it, then it is leave the Eurozone and go cap in hand to washington, but I hope we don't reach that point, I honestly do.

Hynek Filip said...

Edward, there is no role model. All of us to the west of Kiev are collectively guilty as charged, and we all need to reform. We borrowed too much, and we ate too much. Now we must pay and there is no way whatsoever to get out of the hole by borrowing more. It is as simple as that.

I do realise that it will be extremely hard for the psyche of most of us (myself included) to lose thousands and thousands an tens of thousands of euros and find bottom at, say, one third of our current net worth.

But, at the end of the day, does it really matter if you are worth a million dollars, or mere three hundred thousand? There is no difference. You will still be able to drive a car (well, it will not be a six litre, 350hp Chrysler beast, but a used Skoda Octavia), and you will be able to enjoy your coffee in peace. My sons will not go to Harvard Law School, but to Brno Technology Institute (and they may be better off for that).

So instead of issuing truckloads of EU bonds which may turn as worthless as the Irish will so very soon, let us do the obvious. Cut the red tape, forget global warming, political correctness and similar pastimes of the super rich. Fire half the bureaucrats and keep the rest at half pay. Let the walking dead corporations die. Bite the bullet and forget half of our bank deposits. Liquidate the welfare state and tell everyone that there is only one thing in store for the foreseeable future: hard work.

As long as this is not the way out preferred by European politicians, I am not selling my garden. I am actually pretty good at growing potatoes and maybe I will be able to barter them for a rabbit or two. To eat on Sundays, you know.

Edward Hugh said...

Hi again,

"Edward, there is no role model. All of us to the west of Kiev are collectively guilty as charged, and we all need to reform."

Well look. All I can say is that I wish you well over there in the Czech Republic with this pioneering model to show the rest the way. I don't think I'm exaggerating if I say that in this sense, the cultural, one, Spain is a pretty conervative country.

I don't think - and especially after what people are having to put up with as a result of the introduction of the Euro - that people are in the mood for too many more experiments.

I think there is such a thing as second mover advantage here. When someone has another tried and tested method available somewhere, then I am willing to give it serious consideration, but in the meantime I prefer to stick with the tried and tested, so you will forgive me if I go ahead with my EU bonds and Obama, and try to encourage Spain to work with the US and Germany, and see if we can't tunnel our way out of this "hell hole" together.

Hynek Filip said...

Just one more comment re Germany: I would be very very careful about pointing the finger in their direction. Since 1989, they managed to pay for the re-unification, and they also managed to buy and rebuild most of the industrial base of all the backwater countries between Berlin and Moscow. They still have a lot left in them, no doubt about that.

Edward Hugh said...

Hi again,

"I would be very very careful about pointing the finger in their direction."

I'm not pointing any finger. I'm just pointing out that they are in serious economic trouble. As serios as in Spain, but different. When the others (UK, US, Spain, Ireland) were hard at work running up debts and deficits, Japan and Germany we running up huge surpluses, which were then recycled and lent to those who were buying their products. Thus their banks are among the first affected by the meltdown in the economies they leant money to.

Austria is the same case, only Austria was financing all the deficits in the East. This is why Austria's future is now enormously at risk, and they may be more receptive than people in Spain to your proposed experiment.

Basically Japan and Germany have quite simply let their populations get too old, and the future for them must look very uncertain and insecure, unless that is they like this very painful boom bust experience every five years or so.

Hynek Filip said...

This is my very last comment and then I will, honestly, follow the advice of Jacques Chirac and keep my mouth shut.

What will you do if the Germans get tired of paying for others and simply say: "Pay for your mess yourself" ?

The answer is plain and simple: you will have to do as I say.

Time will tell.

Best regards and best wishes

Hynek Filip, Prague, Czech Republic