3rd September 2012
What did they announce?
There is to be a change in the Spanish bank rescue mechanism called the FROB which is to become a "bad-bank". This is quite a change in itself as before the Spanish authorities had loudly proclaimed that a bad-bank was not going to be necessary in Spain. For those unfamiliar with the concept of a bad-bank it is an institution which will take the weaker assets off the books of the Spanish banks. In essence those that represent airports which never opened and empty apartment blocks and of course the associated loans.
So we are seeing the usual type of clean-up which is another example of the privatisation of profits and the socialisation of losses. This is in spite of claims by Spanish ministers that this will show a profit. You see we know what happens here as we have the example of the Irish bad-bank called NAMA which was established with Irish ministers making exactly the same claims. The reality is that according to the Irish blogger Jagdip Singh is that it has so far lost just under 25% on its overall holdings.
As we survey the Spanish banking system we see one where the size of property loans that are to use the euphemism "problematic" is around 180 billion Euros. Or rather that is the estimate so far as experience has told us that closer examinations tend to see such numbers rise. If we recall Bankia's situation from the spring the estimate of the required bailout doubled in a fortnight.
Another potentially unstable lifeboat
The FROB itself is to be expanded to a capacity of 120 billion Euros to cope with the requirements outlined above. This is up from the previous 90 billion Euros. All well and good until we recall that it actually only had a capital of 15 billion Euros which as I pointed out on the 25th of May
This leverage capacity can be increased up to 6 times with the approval of the Ministry Of Economy and Competitiveness.
So 15 billion times 6 gets us to the 90 billion. However as I pointed out then dealing with likely losses via a leveraged institution has an obvious problem. What if the losses turn out to be larger than the capital base? We await to see how the Spanish government will back the new increased FROB capacity.
More fundamentally exactly how will leverage solve problems which were created by an excess of leverage?
Wasn't the European Financial Stability Facility supposed to be backing this?
Exactly, but so far we seem to be lacking any real details of what will happen here apart from the original promise of up to 100 billion Euros of bank aid. Even the 100 billion Euro capacity compares unfavourably with the new 120 billion FROB capacity.
I discussed the problems which led to Bankia's nationalisation back on the 8th and 25th of May. It published its latest figures after trading had closed on Friday and they showed a further loss of 4.4 billion Euros. To stop it collapsing the FROB has stepped in but it is much lighter on the detail of how much this will cost, than hyperbole.
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