News today, 18th January 2011…
In this week’s news, there are signs that we could be close to resolving the question marks over a key part of the Spanish economy.
The Spanish government is attempting to lay its cards on the table and demonstrate, once and for all, the solvency of its banking system.
Doubts over the finances of Spain came to a fore last year as Ireland joined Greece in requiring a substantial bailout from the EU to support its banks.
With the world economy only just emerging from the worst depression in living memory, it was no surprise that concerned investors feared repeat performances from other indebted countries.
After the European banking stress tests last July, the savings banks or ‘Cajas’ were shown to be the weak link in the Spanish banking system.
Major restructuring has already taken place with the Cajas, with complex mergers cutting costs and shrinking their number from 45 down to 17.
However, continued concern about these banks has been affecting sovereign debt, which in turn, has affected the banks and their ability to raise money.
In a bold move this week, the Prime Minister announced plans to clean up the country’s network of savings bank by disclosing their exposure to bad loans.
Finance in the form of the state’s ‘Fund for the Orderly Restructuring of the Banking Sector (FROB)’ is ready to provide capital where needed.
Most analysts believe this month’s disclosure exercise will reveal that Spanish banks need a little more capital, but not enough to cause Spain to go cap-in-hand to the EU for cash.
This opinion is shared by the governor of the Bank of Spain, who said that ‘perception is much worse than reality’ and that ‘the country’s savings banks will need no more government-assisted capital than that already committed’.
If the Cajas do reveal their true exposure to be manageable, the funding markets will regain some confidence in Spain which is clearly suffering from an avalanche of risk hype.
This was evidenced by EU leader Van Rompuy who called it ‘absurd’ that market valuations of default risk for some eurozone countries were bigger than for emerging markets like Ukraine or Argentina.
And, in what could be argued as an immediate effect of these confident announcements, investors showed renewed appetite for Spain with a successful bond sale later in the week, at discounts lower than anticipated.