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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?

Sunday, March 29, 2009

And So It Begins, The Bank Of Spain "Intervenes" In A Spanish Savings Bank

Well , we didn't have to wait too long. Only last Friday I wrote the following:

Two Spanish regional savings banks have already reached a preliminary merger deal - Unicaja, based in Spain’s southern Andalucia region, and the smaller Caja Castilla La Mancha (CCM), located in the central-southern province of the same name - following talks which were carefully brokered by the Bank of Spain. Clearly this merger willl need to be followed by a capital injection from Spain’s Deposit Guarantee Fund to help them clean up the “troubled assets” which will naturally be found in the combined accounts of the new bank which emerges.

Today we learn that the merger is off. It is off for the simple reason that Caja Castilla La Mancha is about to cease to be an independent, autonomous entity. It has been "intervened" by the Bank of Spain. This is the first, it will not, of course, be the last.
According to Noticias Cuatro:
The governing council of the Bank of Spain has taken the decision to intervene in the operation of the Caja after carrying out an analysis of its financial position, thus taking as read that the negotiations which might have lead to its merger with the Andalucian 'Unicaja' have not been able to reach a successful conclusion.

The "intevention in Caja Castilla La Mancha will mean in the first place that the Bank of Spain will now manage the Caja directly via the management commission it is about to establish. Sources at the central bank have given an assurance that all the banks clients' savings are guaranteed. The Bank of Spain will now negotiate with the government urgent measures to guarantee the liquidity of the Caja, and its normal functioning.

In the second place, the Bank of Spain will be responsible for making an immediate detailed evaluation of all the Caja's assets and liabilities. In addition the central bank intervention implies the immediate replacement of the entire previous bank Administrative Council.

The last time the Bank of Spain intervened in a Spanish bank was in 1993, when the central bank too over control of Banesto. The necessary decisions will be taken in the next few hours since all other potential solutions have been discarded, including the assimilation of the Caja with Caja Madrid.

The Spanish newspaper El Pais reports that the Spanish cabinet (the Consejo de Ministros) are holding an extraordinary meeting at 18:00 this afternoon to discuss a proposed Decree Law to inject capital into the bank.

According to, the "hole" in Caja Castilla La Mancha could be something in the order of 3 billion euros. This money could be paid from the bank funded Deposit Guarantee Fund (FGD), however, and as I said on Friday:

the (FGD) insurance fund holds only 7.2 billion euros in bank contributions, and since this is orders of magnitude less than the size of the problem it is obvious the government will end up having to putting money into the recapitalisation process, and especially into the Savings Bank sector, since the Spanish press has been reporting that 20 of Spain's 45 savings banks are now considering mergers. And it is obviously only a matter of time before one of the mid-sized Spanish banks like Popular, Sabadell or Banesto joins the consolidation process.

The Spanish government said following this afternoon's meeting that it will provide up to 9 billion euros to Caja Castilla-La Mancha to shore-up the bank's finances and protect depositors. Pedro Solbes in the press conference was at pains to stress that the 9 billion was an "upper estimate" that would not be needed, and stated that the final quantity anticipated would be between 2 billion and 3 billion, which sort of confirms the estimate offered by "sources" earlier in the day. The funding is provided via the Bank of Spain and guaranteed by the Spanish Treasury. Solbes also explained that "if at the end of the day the bank is declared insolvent (quebranto)" that is, if there is not sufficient money in the bank to cover all liabilities (deposits and debts) the Royal Decree will stipulate how the outstanding obligations will be divided between the Treasury and the FGD.


Anonymous said...

Hi Edward,
one question.
The goberment garanteed 100K of any deposits some months back(backed by FDG). Does that mean that is garanteed as long as there is money left in the Fondo de Garantia, or that is otherwise backed by any means (faith in goverment)? I mean, another bust and the spared money in the FGD will be exhausted....

Good Sunday evening!

Eddy said...

In order to avoid draining the FGD the money initially comes from the Treasury.... Only if there is a proper "liquidation" the Treasury can recover the funds from the FGD.

For now, there is no liquidation, only a line of credit and removal of present managers.

Edward Hugh said...

Hi Eddy,

"Only if there is a proper "liquidation" the Treasury can recover the funds from the FGD."



"or that is otherwise backed by any means (faith in goverment)?"

Well obviously this is the case, otherwise this

"another bust and the spared money in the FGD will be exhausted...."

So, like I have been saying, the Spanish banks stay solvent as long as the Spanish government remains solvent. After the Paris decisions of October 12 2008 (that no systemic bank would be allowed to fail), we have moved from a banking crisis, to a fiscal crisis of the state.

It is just that this isn't clear yet, since 3 billion euros here, or 5 billion euros there is no big deal. It is when we move up a level, that things start to get tricky, since this should coincide (2010/2011) with confidence that all the deficit spending on "stimulus programmes" is worth a light, and the patience of the EU Commission and the ratings agencies will start to wear thin as deficits continue, and debt to GDP starts to surge.

Would quickly happen.

Anonymous said...

We are getting closer to UK and USA. This is good, isn't it?

Anonymous said...

George Soros isn't worried by the failed gilt (sovereign debt) auction in Britain last week. He calls it "a blip". He would still buy UK bonds, saying: "it depends on the price". I’m not so sure. First, international bond markets are about to run into a big bad brick wall. Sovereign, municipal and corporate debt will be unleashed in such amounts that portions of it are certain to fall by the wayside. This risk will prod many issuers to try and sell their debt sooner rather than later. Ironically, they'll do so partly because they fear it will be more expensive to issue their bonds as time goes by. If enough parties follow this logic, it will get more expensive sooner. With interest rates close to 0%, yields of 5% or more start to look attractive, if you can finance the purchases with borrowed money. Who has access to such credit? Large financials, through central banks. Thus, wealth gets more concentrated by the day. Nice world if you can get it to live in. Still, even the big boys will only buy if they know they can easily get rid of the paper when they want or need to.

As for Britain, its financial situation, coupled with the plummeting status of Gordon Brown, could indeed give it a label of "not sufficiently attractive", or "too risky", for a bond market that can pick and choose at will. And, again given the surplus of bonds about to be issued, it is entirely possible that market will freeze, or rates go up so much that it becomes fiscally irresponsible to offer sovereign debt for sale. Of course, if Britain can't do it, it won't be alone among countries. And it makes you shudder to think what will happen to towns and companies that will for all intents and purposes lose the sole remaining vehicle to finance their operations. I know I'm -partly- speculating here, but then, so is anyone thinking it'll all be a smooth ride. There is less investment money available for a fast growing amount of debt. The outcome is obvious.

And while Britain may be the weakest of the strong, the weaker among the weak can be sure they will be pushed aside by the traditionally strong countries, kind of like we're watching the markets according to Darwin. They may be "interesting", pretty they won't be. The biggest theme coming out of this week's G20 could be that developing countries turn their backs on the rich and formerly rich parts of the world, if only to protect themselves from more blood riddled exploitation. What do they have to lose but shackles?


Anonymous said...

The final two sentences in the George Soros interview are rather haunting.

"Look, we are not going back to where we came from. In that sense it (economic decline) is going to last for ever."

Hynek Filip said...

Edward, you mentioned earlier that EU bonds may be the only way out of this mess.

Now, it appears that even if there indeed was the political will to enable the EU to issue its own bonds (which I do not think there is, at least at the moment), it may take quite some time to establish the institutional/legal framework.

Let us say, it would take many months. However, if the Spanish banking system starts collapsing on a large scale, and that may happen any time now, you would need remedies that work more or less immediately.

One, Spain could try to sell a lot more of its own bonds for real money. Could work for a while, but I am afraid that the yields would soon reach the stratosphere.

Two, new Spanish bonds could possibly be sold to the ECB in exchange for freshly printed cash. I have no idea whether anything like that could work (and would be allowed by the Germans).

Three, the Spanish government would stick to the October Paris manifesto. It would only support the systemically important banks and would let the small ones die. The banking system should be able to bear at least a certain amount of losses, and the government should act only as the lender of last resort.

Obviously, the small bank depositors would suffer as well. However, I am afraid that the Spaniards will pay the price of the saving of the nations banks anyway. If no deposits are lost, then the price will be paid in the form of (much) higher taxes, or higher inflation, or Italian-style over-indebtedness and prolonged economic slump, or all of the above and then some.

Edward Hugh said...

Hello Hynek,

"Let us say, it would take many months. However, if the Spanish banking system starts collapsing on a large scale, and that may happen any time now, you would need remedies that work more or less immediately."

Well look. My opinion is that even though this bank problem is now inevitable - neither monetary nor fiscal policy are working, both the steering and the brakes on the car are broken - we won't hit the buffers at the end of the track tomorrow.

My best guess is still 2011, although that doesn't mean something shouldn't be done tomorrow. Although, like you say, we don't seem to have the political will to do anything at the moment. We are like Ulysees in the land of the Lotus Eaters.

However, I want to stress: this won't blow up tomorrow (although it will blow up). There is fire power left in the banking system.

The problem has simply broken through the first line of defence, that is all. So now we move to the second line of defence, and ask all women and children to seek safety in the church (just in case).

But if we fight with the same weapons, then we will lose the next round too.

So then we will have to regroup in the old part of the city, and fight a last ditch stand, and there we will somewhat resemble John Wayne and his friends in that old film that so fascinated me as a child, now what was it called?

Oh yes, The Alamo.

Hynek Filip said...

"But if we fight with the same weapons, then we will lose the next round too."

I would rather say, if we keep on shooting at false targets, it does not really matter what weapons we use.

In my opinion, it is fundamentally wrong to give top priority to the saving of the banking system. As far as I can see, the Spanish banks (as well as our own banks) are largely exposed to local (Spanish, Czech) businesses and, especially, households.

Now, what is the key driver of defaults on retail loans (mortgages, credit cards, etc)? Assuming stable interest rates, it is unemployment. If the number of jobless people in Spain goes up at the current rate of 150 000 every month, default rates will soar. With unemployment exceeding 20, or rather 25%, default rates may well reach levels that simply can not be borne by most of the banks. Given that 20% unemployment is likely to arrive no later than this coming October, I can see the first wave of banking collapses coming before the year is out.

Which brings me to the point: instead of pouring billions into the banking system (which is about as useful as hunting deer with the good old 88mm flak gun), the billions should be invested to keep people employed. As every businessman knows all too well, the line between success and failure is often very thin, and the capital necessary to make the difference may be relatively small.

In other words, it is necessary to invest possibly limited, but well targeted amounts of money to keep businesses afloat and the would-be jobless employed.

I am fairly convinced that if the unemployment rate keeps on rising at the current rate, there is no way most of the banks can be saved, and that, at the end of the day, they may even require more EU billions than the EU will be ready to spend.

Eddy said...

Hynek: the root of the problems for the bankig system are not the unemployed (yet) but land developers and r.e. firms.

Bancos and Cajas are trying to "kick the can along the road" by refinancing the onerous debts of this the vain hope that re. prices will recover back again in 2010/11.

The problem is that the value of the collateral of the tottering r.e. firms is sinking VERY fast (especially land in development)

Hynek Filip said...

Point noted. I did not mean that the unemployed are the key issue of today, they will not bring the banks down now, but may well do so in the very short term.

Actually, the situation in Spain is very, very similar to our own. We are beginning to see major developers fail (ORCO being the most recent example), but the local banks can cope with that.

However, unemployment is on the rise and the retail loan defaults dutifully follow. The impact of retail loan defaults caused by rising unemployment will be very significant especially in 2010/2011.

Mind you, we are talking of expected unemployment rates of maybe 12-14%, not the Spanish 25% (or whatever we will finally get).

Hynek Filip said...

By the way, the developers will not be helped by rising unemployment either. The unemployed do not get mortgages very often, and if there are no mortgages, there will be few houses sold and few developers left standing...

Edward Hugh said...


I think Eddy's point is valid.

"The unemployed do not get mortgages very often, and if there are no mortgages, there will be few houses sold and few developers left standing..."

Quite, and that is the situation we have now. That is why the developers are trying to kick the can along the road, and when they finally give in, not only will there be few developers left, there will be few banks left standing.

There is no recovery in 2011. As I keep saying, Japan land prices are now at 1984 levels, which mean in Spain 2025 land prices can be around 1998 levels. I really don't see why people imagine Spain will be better than Japan. Japan at least had its own savings, and could export.

Of course unemployment will be a key issue, and it doesn't matter whether we hit 20% in October (quite possible), December, or next March, it is going up fast, and it won't stop (for some magic reason) at 20%, it will keep going up and up till Spain recovers export competitiveness and until all that debt is restructured.

So at the end of the day, you are right, it is the unemployment which will matter, and the banks are simply "dead men walking".

José Luis said...

Returning to the title of the original post ("And so it begins ..."), the governor of the Bank of Spain intervened tuesday in the economic debate with new proposals far far away from Zapatero´s ones:

- descentralized salaries barganing.
- new crisis contracts for workers.
- improving housing rental.
- freeing energy and transport sectors.
- etc.

Implicitly Miguen A. Fernández Ordóñez is saying Zapatero isn´t doing anything for reestructuring spanish economy. He added that spanish rates of debt are just reaching its limits now.

Meanwhile Zapatero is only waiting for San Obama and his miracles.