QNB Group: Rescue Efforts to Spanish Banks Deemed Insufficient

Doha, July 21 (QNA) - In spite of a recent breakthrough decision by the EU to boost their support for Spanish banks, QNB Group argues that planned measures may not be sufficient. Clarity on the bailout terms and a revival in the Spanish economy would be needed to put the banks on firmer ground, according to QNB Group. The net borrowing of Spanish banks from the European Central Bank (ECB) reached a record level of euro337bn in June 2012, a seven-fold increase compared to the year before. This excess originates primarily from the ECB's decision to offer euro1.1trn in two tranches during December 2011 and February 2012 to Euro-area banks at very low rates (1 percent). However, this injection of cheap funding proved to be insufficient. As a result, on June 9, the EU offered up to euro100bn in additional support. Then on June 29, it went further by agreeing to provide these funds directly to the banks, rather than via the already debt-ladden Spanish government. These rescue plans are just the beginning, according to QNB Group, as Spanish banks engage in a long drawn process to clean up their balance sheets. Spanish banks are still reeling under the pressure of toxic assets that have mainly been left over from a property bubble that burst four years ago. Household ownership increased substantially over the last decade, to reach over 75 percent, partly as a result of changing tax regulations which encouraged home ownership. Mortgage related lending is estimated to have reached euro627bn by the end of 2011. The IMF reported recently that the Spanish banking sector's non-performing loans (NPLs) ratio increased from 0.9 percent in 2007 to 7.6 percent in 2011, when they totaled euro136bn of all loans. The construction and property sector accounts for 72 percent of this amount. The EU bailout of the banking sector will come from the Eurozone's European Financial Stability Facility (EFSF), of which euro30bn has already been approved in June. Three further payments, totaling euro45bn, are expected to be disbursed over the next year, as the individual banks recapitalization plans are presented and assessed. A final euro 25bn would be made available to buy up difficult to sell debt. In spite of all these measures, markets and rating agencies have remained unconvinced, suggesting that the rescue efforts were seen as inadequate. The spreads on Spanish government five-year credit default swaps (CDS), a way of insuring debt against default, hit a high of 599 bps in May. Even after the latest bailout announcements, it was still as high as 554 bps on July 13. A related market signal was the yield on ten-year government bond, which recorded a high above seven percent in July. The heightened risk is reflected by credit ratings changes. On June 26, on the eve of the EU summit, Moody's downgraded both the Spanish government debt and 28 banks. One of the main reasons behind the negative market reactions is the fact that the banking system is large in both absolute and relative terms, with assets of over euro 3trn, more than triple Spain's GDP. New regulatory measures will require Spanish banks to raise loan loss provisions from the current seven percent to 30 percent, which in itself will result in a projected euro30bn funding gap in banks' balance sheets. Furthermore, Spanish banks have an estimated euro600bn in bonds that need to roll over in 2012. The prospects of takers seem weak and the costs for servicing the debt are increasing. Aggravating the conditions in the banking sector is the weak economic and fiscal environment. The Spanish housing market continues to collapse, with the recent Housing Index reading a decline by 8.3 percent year-on-year as at June 2012. Alone with this is high unemployment at 24 percent, a debt-to-GDP ratio at over 140 percent, and a fiscal deficit at 8.5 percent of GDP. Under such circumstances, the markets are fair in assessing that much more is needed than is currently on offer to improve the prospects for the banking system. QNB Group sees more efforts by the government in getting the economy back on a growth trajectory as a key driver to reverse the current banking system malaise. (QNA)