New Open Europe briefing: Funding needs of Spanish banks could top €110 billion
Press release: IMMEDIATE
25 June 2012
Funding needs of Spanish banks could top €110 billion
Following this morning's request by Spain for a rescue package for its banks which could total up to €100bn, Open Europe has published a new briefing looking at the funding needs of Spanish banks and the Spanish state. The briefing argues that, taking into account that Spanish house prices may drop another 35%, the country's banking sector could need an immediate €110bn capital injection to withstand potential losses – substantially above the recent official estimates. Without substantial banking reform and an upturn in the state of the Spanish economy this amount could increase further. Open Europe estimates that total exposure of EU countries to the Spanish economy is around €913bn.
Open Europe’s Head of Economic Research Raoul Ruparel said,
“Funding for the Spanish banking sector is an incredibly fluid target and could go well beyond €100bn if the situation in the Spanish and eurozone economy continues to deteriorate. Though it comes with merits, if not carefully managed and subject to the right conditions, this package could merely serve to deepen the dangerous loop between Spanish banks and government without offering a clear solution to the crisis. In turn, if more pressure is piled on Spanish banks and therefore government debt, it could force Spain into a full Eurozone bailout.”
“With Spain facing funding costs of €548bn over the next three years, the Eurozone’s bailout funds are not equipped to handle a Spanish rescue. To avoid such a scenario, the current bank bailout plan just has to come with the right conditions – including losses for bank bondholders and bank wind-downs.”
The IMF estimates of €40bn for Spanish bank recapitalisation look too low. We estimate that the banking sector needs between €90bn and €110bn, meaning even the €100bn rescue package currently being discussed may not be enough. The amount needed could further increase if banks struggle to raise provisions against losses on top of their capital requirements. The external stress tests announced last week are equally too low given that they worked from current data, which may be insufficient or incorrect.
We expect that the rescue package currently on the table, along with higher borrowing costs, could increase Spanish debt to 94% of GDP in 2013 and 112% in 2015 (with only slightly lower growth than expected).
This package will intensify the sovereign-banking-loop in Spain as banks come under more pressure to load up on Spanish debt. Unless the far-reaching problems in the Spanish banking sector are resolved – which looks unlikely – further reinforcing this loop could eventually force Spain into a full bailout (as the burden becomes too much for one side to stand). This is something for which the Eurozone’s current bailout fund would not be equipped.
Ultimately, Spain’s problems are not confined to its banking sector. The state faces funding costs of €548bn over the next three years, as well problems as controlling regional spending and encouraging economic growth – all of which, again, makes the risk of a full bailout for Spain more likely.
Therefore, in order to avoid the plan being counterproductive, stabilising the country’s banking sector in longer requires the right conditions – including ‘bail-ins’ and bank wind downs.
The ESM will not be in place to provide the funds, meaning that the EFSF will have to. This reduces questions over seniority but will lead to demands for collateral from Finland – a messy issue which could itself prompt seniority concerns.
We estimate that total exposure of EU countries to the Spanish economy is around €913bn, a huge amount which highlights the vital importance of ensuring that this rescue package works the first time around.
To read Open Europe's new briefing in full, click here:
NOTES FOR EDITORS
1) For more information, please contact the office on 0044 (0)207 197 2333, Raoul Ruparel on 0044 (0)757 696 5823, or Mats Persson on 0044 (0)779 946 0691.
2) Open Europe is an independent think-tank calling for reform of the European Union. Its supporters include: Lord Leach of Fairford, Director, Jardine Matheson Holdings Ltd; Lord Wolfson, Chief Executive, Next Plc; Hugh Sloane, Co-Founder and Chief Executive, Sloane Robinson; Sir Stuart Rose, former Chairman, Marks and Spencer Plc; Jeremy Hosking, Director, Marathon Asset Management; Sir Henry Keswick, Chairman, Jardine Matheson Holdings Ltd; Sir Martin Jacomb, former Chairman, Prudential Plc; Lord Sainsbury of Preston Candover KG, Life President, J Sainsbury Plc; Michael Dobson, Chief Executive, Schroders Plc; David Mayhew, former Chairman, JP Morgan Cazenove; Tom Kremer, Chairman, Seven Towns Ltd.
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