An article in the Spanish daily El Pais reveals that the Spanish banking sector needs to raise 62 billion Euros before the end of the year to keep the sector’s international creditors happy. A far from easy task given the ongoing international liquidity crunch, and a hot potato for the rest of the year say banking analysts. It also has big implications for Spain’s housing market, which will stay frozen unless banks get the money they need to start lending again. The Spanish banking association says the liquidity crunch is a more serious problem than the rising rate of mortgage delinquencies.
Some relief came in May, when Spanish banks and savings banks managed to raise 17 billion Euros in the credit markets, taking the total raised this year to 20 billion. But with just 6 months left of the year, including the quiet summer months of July and August, the 62 billion Euros that Spanish banks need to pay their creditors will be hard to find in time. Worse still, 62 billion Euros is the amount needed to pay down existing loans, and does not take into account the money Spanish banks need to lend to their clients. Jose Luis Olivas, president of Bancaja, one of Spain’s savings banks, estimates that the sector needs to raise 175 billion to settle its own outstanding loans and lend to its clients.
Furthermore, it appears that international investors are shunning Spanish paper. More than half of the 20 billion raised in the year to date has come from Spanish banks themselves, suggesting that banks with cash are helping those without.
What happens if the credit market remain closed to Spanish borrowers? asks the article.
One option is to borrow from the European Central Bank’s (ECB) discount window. The problem here is the damage this can do to a bank’s reputation, and the short term nature of the ECB’s lending.
Another option is to offer lenders better returns, which would mean Spanish banks and savings banks having to raise the interest rates they charge their own clients. This is not an easy option when the Spanish economy is already slowing down fast, and the housing market is already struggling to digest higher mortgage rates.
Some Spanish savings banks are even finding that better rates won’t do the trick. “Just being a Spanish company (bank or savings bank) is a problem for raising funds; and if you are a small or mid-sized savings bank, so much the worse,” one banking executive is quoted as saying. “International investors have divided Spanish financial companies into two blocks: those they trust, and those they don’t. Ratings are now worthless.”
No wonder, then, that the Spanish banking association and the Bank of Spain are concerned, concludes the article.