Spain's Banks Still Face Hurdles After Stress Tests
By: Spanish Banks need an estimated 60 billion euros ($77 billion) in additional capital under a worse-case scenario for the economy, an independent stress test showed Friday, removing another obstacle to a European-led bailout.
The 60 Billion euros is less than the 100 Billion euros fellow European countries agreed to give Spain this past summer to help them recapitalize their banks. (see story: Spain's Banks Need $77 Billion in Capital.)
Spain's leaders have expressed hope that the remaining 40 billion euros could be used to buy their country’s bonds as they roll over debt payments coming due in the next year. However, it's unclear whether other European leaders will go along with that.
Financial markets appeared to take the stress test results in stride, with US stocks paring some of their earlier losses on Friday (the stress test results came out after European markets had closed). This suggested investors think the number is credible, or at least not a complete glossing over of the real-estate troubles layered deep in the books of Spain’s banks.
The stress tests assumed a worst-case scenario, with an additional decline of 6.5% in Spain’s GDP from 2012 to 2014 and unemployment rising from the current 24.7% to 27.2%. They also assumed that home prices would decline another 25% after the 23% they’ve fallen already, with land prices falling an additional 60%.
The largest of the Spain’s banks, Santander, BBVA, La Caixa and Sabadell do not need additional capital, according to the analysis.
While the market reacted somewhat positively to the results, there are still several hurdles before the Spanish banking sector is cleaned up.
Still to be determined is what volume of bad assets are going to be transferred to a new so-called “bad bank” and at what price. Once those questions are answered (after what will likely be intense debate in Spain and the European Union) will it be clear whether or not the Spanish government will have to inject money into its banking system and whether or not private investors will start to come in and buy Spanish real-estate.
Thus far, many real estate assets have been written down by roughly 40%. Real estate experts say the more the loans and/or properties are written down before being transferred into the bad bank, the more quickly private equity and vulture investors will step in to buy.
However, the greater the reduction in price, the more losses that must be borne by the bank which held the original loan.
Since several Spanish banks have effectively been nationalized by the government, it would be the taxpayer absorbing the losses. However, if the toxic assets sit in the bad bank for years, perhaps decades, it slows down the healing of the banking system, and also represents lost opportunity costs when it comes to the use of that capital.