Spaanse bankenherkapitalisaties op kruissnelheid

7/30/2019 Spaanse bankenherkapitalisaties op kruissnelheid

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KBCGROUP CHIEF ECONOMIST DEPARTMENT (GCE)

WORKING PAPER 10 DECEMBER 2012

Siegfried Top

0032 2 429 59 91

[email protected]

Spain: financial sector progress made, but economic risks and uncertainty around

sustainability of public finances remain large

Executive Summary

The European recapitalization programme for the Spanish banking sector is broadly on scheme and has

helped to somewhat restore confidence in the banking sector and Sovereign. In the current

environment, the financial assistance programme provided by the euro area countries ( 100 bn) is

enough to cover bank losses on real estate and construction sector exposures, although some risks

remain if the economic recession would protract and start to affect mortgage and industrial loans.

The Spanish government from its side has been profiting from lower interest rates, following the

financial assistance programme, the plans of a euro area banking union and, most importantly, the ECBs

game changing guarantee for the survival of the euro area, the Outright Monetary Transaction (OMT)-

programme. Spain has however not officially applied for OMT assistance, as there are both European

and Spanish counter-arguments to such an official request. The OMT still lacks a proper controlling

counterpart (the Commission and the ESM have no real programme that fits the Spanish situation), and

the ECB seems to be internally divided on how the programme should be technically used. Spain, from its

side, refrains from an official aid request as it would imply a further loss of sovereignty, a possible

stigma on the bond markets (which is in our view limited as the ECBs OMT has no preferential credit

status), as well as fear to lose internal (and external) political and economic influence. Still, the longer

Spain waits to apply for a programme, the higher the probability that financial markets will again start

focus on the rather negative outlook for both the Spanish economy and Spanish public finances, e.g.

ahead of the Italian elections early 2013.

We argue that a new framework should be applied that addresses the specific rebalancing needs ofSpain: via a contract, Spain could receive a form of fiscal solidarity support to address some of its

structural weaknesses (labour market, competitiveness), while the contractual reform pledges given by

Spain should provide sufficient conditionality for the ECB to apply its OMT-support. This would however

require further (political) steps in Euro area integration.


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1. Financial assistance programme for Spanish banking sector on schemeLate November, Spain received from the Commission and the ECB a positive review of its banking sector

reforms, making available a first 39.5 bn tranche of the 100 bn loan from the ESM. This process

started in June 2012, with the application of Spain for an intergovernmental recapitalization loan for its

banking sector. A Memorandum of Understanding was negotiated and, conditional on financial sector

reform and bank recapitalization, the Eurogroup granted an EFSF loan facility of 100 bn. Since then, the

the Spanish funding programme was transferred from the EFSF to the newly founded ESM, without

gaining seniority status. The Spanish request was followed by several banking stress-tests (top-down

and bottom-up) by the Bank of Spain, the Commission, the ECB and independent consultants (July

through September), who identified some 51 to 62 bn capital shortfalls. The banks were categorized

into four groups: Group 0 banks1

Graph 1: Capital surplus/shortfall after taxes (bn EUR) in stress-test adverse scenario

, with no capital shortfalls, including Santander and BBVA. Groups 1 to 3

consists of banks with capital shortfalls (see graph 1), which are now systematically addressed.

The 39.5 bn ESM loan disbursed now will serve a double purpose: 37 bn is used to recapitalize so-

called Group 1 banks (owned by the Spanish state via the FROB)2. 2.5 bn is used to set up a new bad

bank, SAREB, to which around 45 bn assets will be transferred from Group 1 banks, mainly foreclosed

real estate assets and loans to real estate developers. SAREB has a maximum size of 90 bn assets, and

is guaranteed by the Spanish state (adding 9% of GDP to its contingent liabilities). For the banks receiving

an official recapitalization, burden sharing measures have been applied, requiring hybrid capital holders

and subordinated debt holders to undergo a haircut.3

1

Group 0 banks are Santander, BBVA, Caixabank, Sabadell-CAM, Bankinter, Kutxabank and Unicaja

Note that, as the ESM cannot directly recapitalize

banks yet (first a single supervisory mechanism needs to be in place), the new loan adds 4% to the

Spanish government debt-to-GDP ratio.

2Group 1 banks are BFA-Bankia, Catalunya Caixa, NCG (Novagalicia Caixa) and Banco de Valencia.

3In the case of Bankia, holders of preferred shares would face a writedown of 39%, perpetual subordinated debt 46% and investors in

subordinated debt 14%.

25.3

11.2

5.72.2 0.9 0.5 0.4 0.1

-0.2 -0.8 -1.2 -2.1 -2.2 -3.2 -3.5-7.2

-10.8

-24.7-30

-20

-10

0

10

20

30Group 0 Groups 2 &3 Group 1


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In a next phase, early 2013, banks of Group 2 (not state-owned but unable to meet shortfalls of capital

privately)4will be recapitalized. Some of their troubled assets will be transferred to SAREB too. Group 3

banks5

(smaller capital shortfalls but credible private recapitalization plans) can, if necessary, also apply

for an public recapitalization or transfer of troubled assets. As 59.3bn of shortfalls after the bottom-up

stress tests were identified, it is likely that another tranche of 20 bn will be needed in the course of

2013 to recapitalize Group 2 and 3 banks. This also leaves a buffer of 40 bn (available with the ESM),which may remain in a contingency facility for unforeseen new write-downs.

2. Will it be enough?Although the banking stress-tests were severe, the Spanish macro-economic situation continues to

deteriorate and some of the adverse scenario-assumptions may well materialize over the next quarters.

While risks related to the real estate sector seem to be fairly well covered, banks may face additional

losses resulting from the economic crisis and the sharp rise of unemployment. Non-performing loans

(NPL) ratio may thus continue to increase, also in other sectors than real estate and construction (totalNPLs have risen to 10.7%, cf. graph 2).

Still, the severity of the stress-tests is reflected in the levels of probability of default (PD) used. For

example, in the adverse scenario, the cumulative PD for developers is three times as high as the NPL

ratio observed in June 2012, and three times the ratio for firms and five times the NPL ratio for personal

mortgages. In addition, an expected loss of 64% is considered for foreclosed assets. We believe these

stress-tests thus to be credible, despite the fact that our current economic scenario is hovering between

the base and adverse scenario of the stress-test. This would also mean that, if our economic assessment

is correct, the Spanish banks would remain well-capitalized (between 6 and 9% core tier 1 ratio).

Table 1: assumptions of banking stress-test scenarios versus current scenario

4Group 2 banks are Banco Mare Nostrum (BMN), CEISS, Liberbank and Caja 3

5Group 3 banks with capital shortfalls are Banco Popular and Ibercaja

Stress-test Stress-test Current KBC

base scenario adverse scenario base scenario

2012 2013 2014 2012 2013 2014 2012 2013 2014

GDP (real growth in %) -1.7 -0.3 0.3 -4.1 -2.1 -0.3 -1.3 -1.2 1.0

Unemployment (in % of lab. Force) 23.8 23.5 23.4 25.0 26.8 27.2 25.1 26.6 26.1

Real estate house prices (yoy in %) -5.6 -2.8 -1.5 -19.9 -4.5 -2.0 -7.8

Land prices (yoy in %) -25.0 -12.5 -5.0 -50.0 -16.0 -6.0 #N/A

Capital shortfall 25.9 59.3

Threshold (CT-1 ratio, end 2014) 9% 6%


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Graph 2: NPLs (in % total loans) further on the rise Graph 3: Unemployment rate further increasing

Source: European Commission

Much will thus depend on the economic growth scenario for Spain and the EMU. At the moment, our

growth forecasts for 2013-14 remain well above the adverse scenario of the stress tests (see table 1). We

expect the contraction of the Spanish (domestic) economy to continue in 2013 (weak consumer

confidence and retail sales, cf. graph 4), but a mostly export-oriented recovery to take place from mid-

2013 on, with average year growth to return to positive numbers in 2014. Although the unemployment

rate has further risen (upto 26.2% in October 2012), producer confidence indicators have been

bottoming out lately (see graph 5) and Spanish exports have also been on the rise. As a result, we

believe that the impact on the strongest Spanish banks balance sheets (Group 0 and 3) will remain

manageable, while the weakest banks (groups 1 and 2) can if necessary fall back on the remaining 40

bn of the financial assistance programme.

Graph 4: Consumer confidence and retail sales weak Graph 5: Producer confidence bottoming out

(above 50 = expansion, below = contraction)

9

10

11

12

13

14

15

16

20

21

22

23

24

25

26

27

Jan/2011 Jul/2011 Jan/2012 Jul/2012

%

Spain (lhs)

EMU (rhs)

-12

-10

-8

-6

-4

-2

0

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

Jan/2011 May/2011 Sep/2011 Jan/2012 May/2012 Sep/2012

Retail sales (Y/Y), rhs

Consumer confidence

(st.dev. Lt average), lhs

35

40

45

50

55

60

Ja n/ 2011 Ma y/ 2011 S ep/ 2011 Ja n/ 2012 Ma y/ 2012 S ep/ 2012

PMI Manufacturing Spain

PMI Services Spain

EMU Composite


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3. Risk on Spain declined since mid-2012, debt issuances accelerated after OMT-announcementSince the summer, risk appetite towards Spain has clearly increased, with Spanish bonds and equities

rallying sharply, and CDS-premia declining rapidly. Firstly, the containment of the Spanish banking crisis

through the financial assistance programme seems to be successful. Second, the EU plans for the

creation of a banking union and a single supervisor have strengthened the belief that the EMU is still

further integrating and future banking crises will be avoided. Third, and perhaps most importantly, after

giving unlimited liquidity (via the LTROs) the ECB has given the EMU and the euro a life insurance via

its new Outright Monetary Transactions (OMT)-programme. Since the announcement of this essentially

unlimited, though conditional, bond-buying programme, confidence in government bonds of ailing euro-

countries has gradually returned (see graphs 6 and 7).

Graph 6: Spanish bond yields declined, Graph 7: Yield curve Spain returned to normal

but spread remains substantial (in %) (bond yields in %)

Although Spain did not yet apply for any assistance programme that would ensure the conditionality

required by the ECB to activate its OMT, the situation of the Spanish treasury did improve a lot.

Profiting from the renewed demand for Spanish bonds and lower interest rates, the Spanish treasurystepped-up its new bond sales (see graph 8), covering all needs for the rest of 2012 and even creating a

buffer for 2013.

Graph 8: Spanish treasury activity sharply increased after OMT-announcement

(New bond and bill issues, in bn EUR, data up to 5/12/2012)

0

1

2

3

4

5

6

7

8

Jan/2008 Jan/2009 Jan/2010 Jan/2011 Jan/2012

Spain

Germany

0

1

2

3

4

5

6

7

8

9

Spanish Sovereign Curve

12/04/12

Spanish Sovereign Curve

07/24/12

0

5

10

15

20

25

30

T-bills

Government Bonds


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Table 2: funding needs 2013, in bn EUR, % of GDP and % of total debt

Source: Bloomberg, Ameco, KBC calculations

As Spain faces relatively high new refinancing needs in 2013 (see table 2) and continues to run a large

deficit (between 7 and 8 % of GDP in 2012), the financial market trust in Spanish bonds will also dependon its ability to keep its budget in line with the expectations of its excessive deficit procedure and the

stabilization of the government debt ratio. The latest Commission forecasts are a 6% and 6.4% of GDP

deficit without further austerity measures in 2013 and 2014 respectively, and thus Spain is set to miss its

fiscal targets. From a positive side, strong budget deviations from the regions have declined, as the

Spanish central state has founded a regional liquidity fund and established stronger central monitoring

tools. Government debt has increased again by 4% as a result of the new 39.5 bn loan, and is now

expected to increase to 86.1% GDP end-2012. The debt level is expected to peak just below 100% in

2014 (see table 3). Also, the newly founded bad bank SAREB adds up to a maximum of 9% of contingent

liabilities to the Spanish sovereign.

Table 3: Commission scenario for Spanish public finances

2011 2012 2013 2014

GDP growth 0.4 -1.4 -1.4 0.8

General governement

budget (in % of GDP) -9.4 -8.0 -6.0 -6.4

General government

gross debt (in % of GDP) 69.3 86.1 92.7 97.1

The overall budget and debt-to-GDP ratio remain very reliant on the macro-economic situation, and a

stronger than expected contraction of the economy could again deter investors in Spanish bond. The

large funding needs in 2013 (cf. table 2) could become problematic if confidence towards the SouthernEuropean economies would decline again in the running-up to the Italian elections, and leave Spain with

no other option than demand further (and more extended) EMU and ECB assistance, which it at the

moment is still turning down.

in bn EUR in % of GDP in % of total debt

US 3155 25.1 30.9

Italy 314 19.8 15.9

Spain 206 19.5 22.8

Belgium 72 18.6 19.2Greece 32 17.1 9.2

Portugal 26 15.8 13.2

France 319 15.4 17.4

Euro area 1324 13.7 15

Ireland 19 11.5 10.1

Netherlands 65 10.5 15.4

Austria 30 9.3 12.8

Germany 213 7.9 9.8


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4. Why would Spain not apply for an extended programme?It is often said that Spain should just apply for a programme. However, it is important to look at the

different assistance programmes that are currently offered by the ESM (and, indirectly, the ECB). In Box

1, we made an overview of the different modalities of each programme. There are four different types of

ESM (formerly EFSF)-programmes. Spain is currently under the bank recapitalization programme, but in

order to benefit from OMT-support, the programme should be upgraded to a precautionary or

enhanced conditions programme. However, Spain does not comply with any of the outlined conditions

of such programmes. With respect to both its fiscal adjustment and macro-economic imbalances, Spain

fails to meet its predefined targets (see above). Also, Spain experiences serious imbalances related to

its external position, private sector debt, labour market and competitiveness. A precautionary credit line

(PCCL) would in that aspect be excluded, while an enhanced conditions credit line (ECCL) would require

some goodwill of the ESM-board (ministers of finance of the euro area). Moreover, as such a programme

only lasts 1 year (extendable to maximum 2 years), that would probably not allow sufficient

readjustment time for Spain. It could also lack sufficient conditionality for the Council and the ECB,

which appears still to be internally divided (especially from the Bundesbanks perspective) and may

refrain from using its OMT for a large country as Spain.

Box 1: overview of ESM programmes

Putting all elements together, one finds that Spain may currently not be eligible for the OMT-involved

precautionary or enhanced conditions programme, as it does not fulfil the prerequisites (sound

economic situation, adherence to fiscal and economic targets). Spain may thus well be pushed towards a

full economic adjustment programme, with more policy conditionality and for a longer period of time

(e.g. 3 years). This would however not seem acceptable for Spain.

Macro-economic adjustment

programme

Precautionary Conditioned

credit line (PCCL)

Enhanced conditions credit

line (ECCL)

Financial assistance programme

for bank recapitalization

When can it be

applied?

A country with significant

financing needs but lost to large

extent access to market financing

For state with sound

economic and financial

situation, as monitored by

the Commission

General economic and

financial situaton sound, but

not complying for some

criteria of PCCL.

Country is unable to meet capital

shortfalls of its banking sector

Offered help? ESM-loans in conditional

tranches (cf. GIP-countries)

ESM offers loans to member

states, who recapitalize banks

What reforms

required?

Banking sector reforms, fiscal

adjustment and growth reforms

(e.g. labour market, internal

market)

Continue to respect the

eligible criteria as set out in

the Macro-economic

imbalances procedure (MIP)

Obliged to adopt corrective

measures, adressing the

specific weaknesses that are

problematic for market access

Focus only on banking sector

reforms, supervision, governance

and domestic bank laws

Control? Quarterly Troika missions,

requiring all information

deemed necessary

Compliance with institution-

specific conditionality by

Commission and ECB.

OMT involved? No, not until return to bond

markets

Yes Yes No

Currently applied to? Greece, Portugal, Ireland Spain

Loan or primary market purchase,

for 1 year (renewable to max. 2 year)

Enhanced surveillance by Commission and ECB (if needed,

IMF), financial sector control, comprehensive independent

audit of accounts of government, regular missions on

quarterly basis


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From the Spanish side, there are some arguments for not upgrading the current ESM assistance that

have to be taken into account.

- Loss of sovereignty: Spain would lose part of its sovereignty as the Troika (EU/IMF/ECB) wouldimpose independent controls of the Spanish public sector. Also, the Troika would insist on further

reforms on the labour market, liberalizing the internal market and overhauling public finances.

- Fear for a stigma from the bond markets: Spain could be regarded as a fourth weak debtor, afterGreece, Ireland and Portugal, and lose all market access. The ECBs first bond buying programme

(SMP) did not help either (although it was limited at the time and thus incomparable to the OMT).

- The Spanish demands for lower, fixed interest rates are not answered by the ECB . Spain wouldwant to see a fixed ceiling (e.g. 10-year Bunds +100bp) that the ECB would defend with its OMT.

Without such a guarantee being made made, Spain may not see any benefit in an ECB intervention.

- Internal party politics: the Partido Popular faced regional elections, and scored better thanexpected. The Catalan nationalists lost their self-proclaimed referendum for an independent

Catalonia. Still, external help could weaken the position of the central government.

- External prestige/influence: due to the control and reforms imposed by the Troika, Spain would losesome of its prestige as a political power. Also economically, the reforms on the internal market and

the breaking up of monopolies would affect large Spanish companies and their influence (e.g. in

South America these would further lose their teeth, with potential new Repsol-cases)

5. An alternative solution: a convergence and competitiveness contract for SpainA solution within a new framework could be an option to solve both the issues of the Spanish

government (loss of sovereignty and stigma) and the ECB, the Commission and the Council (lack of

sufficient control to avert moral hazard). Both the Commission and president Van Rompuy have been

working on a new integrated framework for the surveillance of economic policies. Next to a mechanism

for systematic ex ante coordination of reforms, a new shock-absorbing mechanism, the Convergence

and Competitiveness Instrument (CCI), is under construction. This CCI is to be based on contractual

arrangements between the Commission and a euro area Member State, coupled with the possibility of

financial support. New contractual arrangements would be made between a state that is facing strong

structural adjustments, in order to strengthen the member states adjustment capacity and

competitiveness. This support could originate from a new fiscal capacityof the EMU and be financed

by a special fund/financial instrument, initially probably from ESM-funding, but in the longer run through

e.g. a euro-budget and euro-bills. The support would consist in a lump sum to be attributed per

contractual arrangement, while the definition and use of the amounts involved and of the disbursement

(which can involve more than one tranche) will depend on the conditionality (measures/reforms to be

implemented) and should be also specified in the contractual arrangement.

If these contractual arrangements would also be recognized by the ECB as OMT-eligible, it could offer

Spain an attractive perspective of receiving structural adjustment support, through a form of EMU-

solidarity, thus not an emergency loan and macro-economic programme. In that way, for Spain, a stigma

would be avoided, while the ECB has enough guarantees to use apply its OMT-programme to keep the

Spanish interest rates at sustainable levels.


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Disclaimer

This publication is prepared by KBC Group NV, or related KBC-group companies such as KBC Bank NV,KBC Asset Management NV, KBC Securities NV (hereafter together KBC).

The non-exhaustive information contained herein is based on short and long-term forecasts forexpected developments on the financial markets and the economy. KBC cannot guarantee that these

forecasts will materialize and cannot be held liable in any way for direct or consequential loss arisingfrom any use of, or reliance on, this document or its content.

This publication is provided for informational purposes only and is not intended to be an offer, or thesolicitation of any offer, to buy or sell the securities or other financial products/instruments referred toherein. The document is not intended as personalized investment advice and does not constitute arecommendation to buy, sell or hold investments described herein.

This publication contains KBC proprietary information. No part of this publication may be reproduced inany manner without the prior written consent of KBC.

The information, opinions, forecasts, and estimates herein have been obtained from, and are basedupon, sources believed reliable, but KBC does not guarantee that it is accurate or complete, and itshould not be relied upon as such. All opinions and estimates constitute a KBC judgment as of the dateof the report and are subject to change without notice.

This publication is provided solely for the information and use of professionals (such as journalists,economists, and professional investors) who are expected to make their own investment decisionswithout undue reliance on this publication. Professional investors must make their own determinationof the appropriateness of an investment based on the merits and risks involved, their own investmentstrategy and their legal, fiscal and financial position.

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