Well, Jonathan Tepper’s initial Variant Perception Report on the Spanish Banking system (here, with Catalan translation here) has certainly stirred things up. After a string of articles in the Madrid press (including this one here, which talks of the “Seven Days Which Shook The Spanish Financial System”), IÃ±igo Vega of Iberian Equities – one of the leading Spanish bank analysts (indeed Iberian Equites was ranked 4th by Starmine for Ibex 35 stocks in 2008, it will be interesting to see if they keep their rating in 2009) – has come out with a full frontal reply. The reply is covered by FT Alphaville’s Tracy Alloway here, and I reproduce the full text here, on my Spain Economy Watch blog.
Not surprisingly Varariant Perception has come back in full swing, and you can find Izabella Kaminska’s FT Alphaville coverage here, while I reproduce the full text on my Spain Economy Watch blog.
Perhaps the key quote in the whole affair is this one from Variant Perception:
“Non-performing loans are being passed off as current, vacuumed up and rolled ito cedulas to deposit at the ECB’s repo window. (Incidentally, that is the only way many Spanish banks are finding any semblance of liquidity right now. Without the ECB, some Spanish banks would have the same liquidity problems that subprime mortgage originators had. The ECB is a mega warehouse, effectively, for the Spanish banking system. This is intimately tied in to the question of funding excess consumption in Spain, which we discussed.)”
As Danish blogger Claus Vistesen so aptly puts it in his summary on Alpha Sources:
In my opinion and apart from the glaring neglect, in the Iberian Equity report, on the macroeconomics of the situation this is the most important omission. This is to say, that had it not been possible (which it still is) for Spanish banks to park many of their assets at the ECB as collateral for funding, they would have effectively needed to mark to a non-existing market (i.e. write off the whole thing in one swoop in which case it would have been bye bye Sandy). I mean, this was what happended with Bear Stearns and Lehmann and then only afterwards did the Fed (and the “appointed” buyers) wade in to scoop up these assets which are now sitting and waiting for better times (presumably, I mean, I don’t know how quick they are ground down to reflect market fundamentals).
Finally, a recent quote from the Economist:
The new accounting guidelines will help Spanish lenders smooth out the effects of the property bust over time. But the risk is that the problems are merely postponed. The ratio of bad loans to the total, property included, has tripled to 4.6% over the past 12 months as unemployment appears to head inexorably towards 20%.
The true picture is worse still. Commercial banks have bought about â‚¬10 billion in debt-for-property swaps, according to UBS. Spainâ€™s savings banks do not disclose the figure. Assume it is similar to their commercial peers and reclassify all these property purchases as bad loans, and then the non-performing loan ratio would be 5.7% (before any further adjustments for loan restructuring). Deferring losses to maÃ±ana doesn’t change the extent of the difficulties facing Spainâ€™s financial system.
So, as the Economist says, we really don’t know what the real level of Non-performing Loans in the Spanish banking system is at this point, mainly because the system itself is not providing enough high-quality, detailed, credible information for us to make that judgement. That is partly why Jonathan Tepper is, I imagine, reduced to popular press articles and testimonials from insiders. And one last question, is there anyone still left out there who continues to believe that the ratio of bad loans actually fell to 4.6 percent in June from 4.66 percent in May? I think all that is necessary for Jonathan’s point – that Spain’s banks are going to some considerable effort to cover up the extent of their growing bad loan problem – to be valid is that the former claim is untrue. C’mon gentlemen, try offering some credible numbers and then people may start to believe you. Have you never heard of getting the bad news all out in order to be able to get on with the job? But isn’t this just Spain’s problem at the moment, people are going to any length not to get on with that badly needed economic correction.